D103 Intermediate Accounting I

Correct answer

B. A single-step income statement combines all revenues and expenses into one section, while a multi-step income statement separates them into operating and non-operating sections.

Explanation

A single-step income statement presents revenues and expenses in one combined section, leading to a simple calculation of net income. All revenue sources and expenses are summed up without separating operating and non-operating activities. In contrast, a multi-step income statement provides a more detailed structure, separating operating revenues and expenses from non-operating items such as interest and gains or losses, offering more insights into the company's core operational performance.

Why other options are wrong

A. A single-step income statement provides a detailed breakdown of revenues and expenses, while a multi-step income statement summarizes them.

This is incorrect because it reverses the actual structure. A multi-step income statement provides more detailed breakdowns of revenues and expenses, while a single-step statement is much simpler, grouping them together.

C. A single-step income statement includes income tax calculations, while a multi-step income statement does not.

This is incorrect. Both single-step and multi-step income statements include income tax calculations, typically near the bottom of the statement. The difference lies in how the income and expenses are grouped, not in the inclusion of taxes.

D. A single-step income statement is used only for small businesses, while a multi-step income statement is for larger corporations.

While single-step income statements are simpler and may be more commonly used by smaller businesses, there is no strict rule that limits their use to small businesses. Both single-step and multi-step income statements can be used by companies of various sizes depending on their needs for detail and financial reporting.

Correct answer:

A. In December, when the product is delivered.

Explanation:

According to the revenue recognition principle, revenue should be recognized when it is earned, which is typically when the goods or services have been delivered, regardless of when payment is received. In this case, the company should recognize the revenue in December, when the product is delivered to the customer. The principle emphasizes that revenue is recognized based on the completion of the transaction, not the timing of payment.

Why other options are wrong:

B. In January, when the payment is received.

Revenue recognition is not dependent on when payment is received. The revenue is recognized when the product or service is provided, not when cash is received. This option is incorrect because it defers the recognition until the cash inflow, which does not align with the revenue recognition principle.

C. In December, when the invoice is issued.

Issuing an invoice does not by itself trigger revenue recognition. The key factor is when the goods or services are delivered. Although the invoice is issued in December, revenue recognition depends on the delivery, not the invoicing.

D. In the next accounting period, when the cash is collected.

Revenue should not be deferred to the next period simply because cash has not been collected. The revenue recognition principle dictates that revenue should be recognized when earned, which, in this case, is when the product is delivered, not when the payment is received.

Correct answer:

B. Recognize revenue progressively as milestones are achieved, based on the percentage of completion.

Explanation:

For long-term projects such as construction, when the company meets the criteria for recognizing revenue over time, the revenue should be recognized progressively throughout the duration of the project. This method, called the percentage-of-completion method, recognizes revenue based on the progress made toward completing the project. This approach aligns revenue recognition with the actual work completed and ensures that the financial statements reflect the ongoing nature of the project, providing more accurate and timely financial information.

Why other options are wrong:

A. Report all revenue at the end of the project once completed.

This is incorrect because under the percentage-of-completion method, revenue should be recognized as the project progresses, not all at once at the end. Recognizing revenue at the end would distort financial reporting and does not reflect the true performance of the project during its course.

C. Only recognize revenue when the customer makes the final payment.

This is incorrect because revenue should be recognized when it is earned, not necessarily when the payment is made. The percentage-of-completion method ensures that revenue is recorded as the work progresses, even if the payment is not received until later.

D. Record revenue only if the project is completed ahead of schedule.

This is incorrect because revenue recognition should not depend on completing the project ahead of schedule. The recognition is based on the work completed, not on the project’s timeline or schedule.

Correct answer:

B. Perpetual Inventory System and Periodic Inventory System

Explanation:

The two main inventory measurement systems used in Intermediate Accounting are the Perpetual Inventory System and the Periodic Inventory System. The Perpetual Inventory System maintains continuous, real-time updates of inventory balances and cost of goods sold (COGS) as each transaction is recorded. This system provides a detailed and up-to-date record of inventory, making it easier for businesses to track their stock levels and cost of goods sold. The Periodic Inventory System, on the other hand, updates inventory balances and COGS only at specific intervals, typically at the end of an accounting period. This method involves physically counting inventory to determine the ending balance, which can be more time-consuming but is simpler and less costly than the perpetual system. These systems are essential for managing inventory and ensuring accurate financial reporting.

Why other options are wrong:

A. FIFO and LIFO

This option is incorrect because FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) refer to inventory costing methods, not inventory measurement systems. FIFO and LIFO are used to determine the cost of goods sold and ending inventory, but they are not inventory measurement systems themselves. While they are important for calculating the valuation of inventory, they do not define how inventory is tracked or updated, which is the focus of the question.

C. Weighted Average Cost and Specific Identification

This option is incorrect because Weighted Average Cost and Specific Identification are also inventory costing methods, similar to FIFO and LIFO. Weighted Average Cost averages the cost of all units in inventory, and Specific Identification tracks the exact cost of individual items. These methods are used for calculating inventory values and cost of goods sold but are not inventory measurement systems.

D. Direct Write-off and Allowance Method

This option is incorrect because the Direct Write-off and Allowance Method are related to accounting for bad debts, not inventory measurement. The Direct Write-off Method writes off bad debts as they occur, while the Allowance Method estimates bad debts in advance. These methods are concerned with accounts receivable, not inventory, and therefore are not relevant to the question about inventory measurement systems.

Correct answer

D. Office supplies used in operations

Explanation

Inventory refers to the goods a company holds for sale in the ordinary course of business or goods that are in the process of being produced for sale. This includes assets intended for sale, items currently in production, and finished goods ready for sale. Office supplies used in operations are not part of inventory because they are typically classified as operational expenses and not items held for resale.

Why other options are wrong

A. Assets intended for sale

These are considered inventory because they are goods that the company plans to sell as part of its normal business operations.

B. Items currently in production

These are considered work-in-progress inventory, which is part of the inventory classification. Items being produced are considered inventory until they are completed and ready for sale.

C. Finished goods ready for sale

These are part of inventory as well. Finished goods are products that have been completed and are ready for sale to customers.

Correct answer:

B. Details about a company's cash inflows and outflows

Explanation:

The statement of cash flows provides detailed information about a company’s cash inflows and outflows over a specific period. This includes cash generated from operating activities, cash used in investing activities, and cash provided by or used in financing activities. It is important for understanding the liquidity and financial flexibility of a company, helping stakeholders evaluate how well the company can manage its cash to fund operations, pay debts, and reinvest in the business.

Why other options are wrong:

A. A summary of a company's assets and liabilities

This is incorrect because a summary of assets and liabilities is found in the balance sheet, not the statement of cash flows. The balance sheet provides a snapshot of a company’s financial position, while the statement of cash flows focuses on cash movements.

C. An overview of a company's revenue and expenses

This is incorrect because revenue and expenses are reported on the income statement, not the statement of cash flows. The income statement provides details about profitability, while the statement of cash flows deals with actual cash movement.

D. A breakdown of a company's equity and dividends

This is incorrect because equity and dividends are primarily detailed in the statement of changes in equity, not the statement of cash flows. The statement of cash flows focuses on cash transactions.

Correct answer

B. It pools various goods into layers of dollar value.

Explanation

Dollar-Value LIFO is an inventory accounting method that pools goods into layers based on their dollar value, rather than tracking each individual item separately. This method aggregates inventory into cost layers and adjusts those layers for inflation. It is particularly useful for companies with a large variety of goods, as it avoids the need for tracking each individual item. Dollar-Value LIFO focuses on measuring the dollar value of inventory, making it easier to manage inflation-related adjustments.

Why other options are wrong

A. It measures inventory based on physical quantities

 This is incorrect. Dollar-Value LIFO does not rely on physical quantities but rather on the dollar value of inventory layers. It focuses on adjusting the value of inventory rather than counting physical units.

C. It calculates inventory using the FIFO method

This is incorrect. Dollar-Value LIFO is a method distinct from FIFO (First-In, First-Out). While FIFO assumes that the first items purchased are the first sold, Dollar-Value LIFO pools items based on dollar values, not physical item flow.

D. It requires detailed tracking of each individual item

This is incorrect. Dollar-Value LIFO simplifies inventory management by pooling inventory into dollar-value layers, eliminating the need to track each item individually, which is a characteristic of other methods like the specific identification method.

Correct answer:

B. It lists all revenues and gains before expenses and losses.

Explanation:

A single-step income statement is a simplified financial reporting format where all revenues and gains are listed together, followed by all expenses and losses. The format does not separate operating from non-operating income or categorize expenses in any special way. It is called "single-step" because it combines all revenue items and all expense items in one step, providing a clear view of net income at the bottom.

Why other options are wrong:

A. It separates operating and non-operating income.

This characteristic is more typical of a multi-step income statement, where operating and non-operating incomes are listed separately to provide more detailed financial analysis. A single-step income statement does not distinguish between these types of income.

C. It includes detailed income tax calculations.

While income tax may be included in a single-step income statement, it is not the primary characteristic. The main focus of a single-step income statement is a simple listing of revenues and expenses, with income tax often included in the "expenses" section.

D. It categorizes expenses into fixed and variable.

Expense categorization into fixed and variable is a method used in some management accounting reports, but not in a single-step income statement. The single-step format focuses solely on total revenues and total expenses without such distinctions.

Correct answer

B. It results in lower net income and higher taxes

Explanation

During inflationary periods, the LIFO (Last-In, First-Out) method assumes that the most recently purchased inventory (which is typically more expensive due to inflation) is sold first. As a result, the cost of goods sold (COGS) is higher, which reduces the company's net income. Lower net income means that the company will pay less in taxes because taxes are typically based on taxable income. This is beneficial from a tax perspective but reduces the reported profitability in the financial statements.

Why other options are wrong

A. It leads to higher net income and lower taxes.

This is incorrect because, under LIFO in inflationary periods, the higher COGS from selling newer, more expensive inventory leads to lower net income, not higher. This would also lead to higher taxes, not lower.

C. It has no impact on net income or taxes.

This is incorrect because LIFO does affect both net income and taxes. With higher COGS, net income is reduced, and this reduction lowers the tax liability.

D. It increases both net income and ending inventory values.

This is incorrect because LIFO results in lower net income (due to higher COGS) and may lead to lower ending inventory values. The ending inventory value is based on older, lower-cost inventory, which is valued at older prices under LIFO during inflation.