QUIZ: Analysing Income Statements

Firm X entered into a contract to build a customized software for Firm Y. The project is expected to take 6 months. After 4 months, Firm X has incurred 70% of the total expected costs but has only completed 50% of the work. How should Firm X recognize the revenue at the 4-month mark using the progress toward completion method?

GlobalTech, a magazine company, offers a one-year subscription where customers pay upfront for the whole year. In January, they received $12,000 for subscriptions from various customers. By the end of March, how much revenue should GlobalTech recognize?

In a contract, if collectability is not probable, but still possible, how should the firm recognize the transaction under IFRS and U.S. GAAP?

Which statement best describes the principle behind revenue recognition under both IFRS and U.S. GAAP?

If a transaction price is variable, what condition must be met for a company to recognize the expected consideration as revenue?

An airline ticket booking agency booked a business class ticket for a client costing $4,000 with a nonrefundable commission of $200. How should the agency recognize this revenue?

A software firm provides a license to clients which can be updated over a 5-year period. If the customer is expected to benefit from updates, when should the revenue be recognized?

How should a fast-food franchise recognize revenue for equipment supplied to its franchisees?

In a software licensing agreement where the software provider retains the right to significantly change the software over the term, when should the revenue be recognized?

What is the revenue recognition criteria for a bill-and-hold agreement where the goods are ready for delivery but are stored at the vendor’s warehouse?

A company using the specific identification method sold 50 units out of 150. How is the cost of goods sold determined?

A company that owns a building incurs monthly maintenance costs. How should these costs be recognized?

A company follows the accrual basis of accounting. It sold goods on December 25th with a one-year warranty. By the end of the year, no goods have been returned or repaired under the warranty. According to the matching principle, how should the company recognize the warranty expense?

A firm started the year with an inventory of 100 units at $20 each. During the year, it purchased 150 units at $25 each. If the firm sold 180 units during the year using the First-In, First-Out (FIFO) method, what would be the cost of goods sold?

A company purchased a machine for its manufacturing unit. The machine cost included delivery charges and installation costs. However, once installed, the company had to train its employees on how to use the machine. Which of these costs should be capitalized?

Which of the following is most likely to be treated as an expense in the period incurred, rather than being capitalized?

If a company chooses to immediately expense a cost that could have been capitalized, how will this decision impact the company’s financial statements in the year the decision was made?

A firm purchased land to build its office. Apart from the purchase price, it also paid legal fees associated with the purchase and incurred costs to clear the land. Which of the following costs related to the land should be capitalized?

Which of the following best describes the impact of capitalization vs. expensing on the financial statements in the first year of purchase?

If a company chooses to capitalize an expenditure that extends the life of an asset, what is the most likely accounting treatment in subsequent years?

Given that a company has capitalized certain costs, how would this impact its Debt-to-Equity ratio in the first year, assuming no debt was used for the purchase?

A firm in its early construction phase capitalized interest of $25 million. In the income statement, an interest expense of $35 million is reported. If no interest has been paid yet, what is the total interest incurred during the period?

A tech company in its initial years incurred $8 million in research costs and $5 million in development costs. Under IFRS, how much would be expensed in the income statement if they can demonstrate the potential viability of the new software?

Which of the following statements is TRUE about the treatment of software development costs under U.S. GAAP?

A manufacturer provides a warranty on its products and recognizes warranty expense in the period of the sale. In the current year, actual warranty claims were 10% higher than the estimated warranty expense. What would be the implication for the firm’s financial analysis?

Which of the following situations is most likely a discontinued operation?

If a company decides to change its inventory costing method, it represents a:

Which of the following scenarios will most likely result in a prior-period adjustment?

An analyst is reviewing the financial statements of a firm that recently sold a significant portion of its operations. The analyst should primarily be alert for adjustments related to:

If a company announces a 3-for-1 stock split, what will be the effect on the earnings per share (EPS) for a company?

If a company reports earnings of $50,000, pays preferred dividends of $10,000 and common dividend of $15,000, and has a weighted average shares outstanding of 8,000, what is the basic EPS?

A stock dividend:

For calculating diluted EPS, when is the convertible preferred stock considered dilutive?

Which statement is true regarding the interest expense of convertible debt?

A company has net income of $500,000 and pays preferred dividends of $50,000. There are 100,000 common shares outstanding for the whole year and 50,000 stock options with an exercise price of $10. The average market price of the shares for the year was $20. What is the diluted EPS?

Company X has a net income of $300,000, preferred dividends of $10,000, and 80,000 common shares outstanding. It has issued convertible bonds, which if converted would add another 20,000 shares. The interest expense saved (after-tax) from these bonds if converted is $5,000. What is the diluted EPS?

Which statement regarding the treasury stock method is TRUE?

Which of the following is true regarding a common-size income statement?

Company Alpha and Company Beta operate in the same industry. If Company Alpha’s operating profit margin is 20% and Company Beta’s is 25%, but Company Alpha has a significantly larger revenue base, which company has a higher operating profit in absolute terms?