Chapter 5
Multiple Choice
1. One concept of income suggests that income be measured by determining the net change over
time in the discounted present value of net cash flow expected to be received by the firm. Under
this concept of income, which of the following, ignoring income taxes would not affect the
amount of income for a period?
2. The term revenue recognition conventionally refers to
3. In the transactions approach to income determination, income is measured by subtracting the
expenses resulting from specific transactions during the period from revenues of the period also
resulting from transactions. Under a strict transactions approach to income measurement, which
of the following would not be considered a transaction?
4. Conventionally accountants measure income
5. Arid Lands, Inc. is engaged in extensive exploration for water in the Caprock Desert. If upon
discovery of water the corporation does not recognize any revenue from water sales until the sales
exceed the costs of exploration, the basis of revenue recognition being employed is the
6. The installment method of recognizing revenue is not acceptable for financial reporting if
7. The principal disadvantage of using the percentage of completion method of recognizing revenue
from long-term contracts is that it
8. One of the basic features of financing accounting is the
9. Which of the following is an argument against using historical cost in accounting?
10. The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in
favor of understating assets and revenues and overstating liabilities and expenses is known as
11. Uncertainty and risks inherent in business situations should be adequately considered in financial
reporting. This statement is an example of the concept of
12. Determining periodic earnings and financial position depends on measuring economic resources
and obligations and changes in them as these changes occur. This explanation pertains to
13. Under what condition is it proper to recognize revenues prior to the sale of the merchandise?
12. Which of the following is not a concept of income identified by Bedford?
13. The definition of the economic concept of income is usually attributed to which of the following
economists?
14. Which of the following is not an approach to determining current value?
15. Each asset—inventory, plant, equipment, and so on—would be valued based on the selling price
that would be realized if the firm chose to dispose of it is the definition of which of the following
current value concepts?
16. The cost to replace assets with similar assets in a similar condition is the definition of which of
the following current value concepts?
17. Income is equal to the difference between the present value of the net assets at the end of the
period and their present value at the beginning of the period, excluding the effects of investments
by owners and distributions to owners is the definition of which of the following current value
concepts?
5
18. Which of the following is not a criteria outlined in SEC Staff Accounting Bulletin No. 101 for the
recognition of revenue?
19. Which of the following accounting theorists called of conservatism the most influential principle
of valuation in accounting?
20. The one-time overstatement of restructuring charges to reduce assets, which reduces future
expenses, is the definition of which of the following earnings management techniques?
21. Deliberately recording errors or ignoring mistakes in the financial statements under the
assumption that their impact is not significant, is the definition of which of the following earnings
management techniques?
22. Overstating sales returns or warranty costs in good times and using these overstatements in bad
times to reduce similar charges, is the definition of which of the following earnings management
techniques?
6
Essay
1. List and three reasons why income reporting is important to our economic society.
2. Discuss the differences between the economic and accounting concepts of income.
3. Discuss the three basic concepts of income as defined by Bedford.
4. Discuss the difference between financial capital maintenance and physical capital maintenance.
5. Define the following terms:
6. Discuss the four types of income defined by Edwards and Bell.
7. What conditions must be satisfied in order to recognize revenue according to Staff Accounting
Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements?
8. Discuss how revenue might be recognized at various points in a company’s production – sale
cycle.
9. Discuss the matching concept.
10. Define the following terms:
10
11. Discuss the concepts of earnings quality and earnings management including: