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INTEGRATED REVIEW SECOND SEM 2023-2024

FINANCIAL ACCOUNTING & REPORTING (FOUNDATION) DEAN ESTER LEDESMA

MODULE 10 A
CONCEPTUAL FRAMEWORK LEVEL 2B – INCOME
A. INTRODUCTION
 FINANCIAL PERFORMANCE
 Profit and its measurement
B. INCOME
 Definition / Nature
 Classification of Income
o Net Income
o Revenue
o Other Income
o Gains: realized / unrealized
C. RECOGNITION AND MEASUREMENT OF NET INCOME (INCOME/EXPENSES)
a. Accrual Basis
b. Cash Basis
c. Modified Cash Basis

A. INTRODUCTION

Financial Performance
 Profit is frequently used as a measure of performance or as the basis for other
measures, such as return on investment or earnings per share. The elements directly
related to the measurement of profit are income and expenses. (Conceptual
Framework)
 The recognition and measurement of income and expense depend in part on the
concept of capital and capital maintenance used by the entity in preparing its
financial statements.

Nature of Income and Expenses

 Income and expense are elements of the financial statements that relate to an
entity’s performance for a given period of time. Contributions by holders of equity
claims are not income and distributions to them are not expenses.

 Classification of Income and Expenses:

Income and expense are classified and included either
o In the statement of profit or loss, or
o Outside the statement of profit or loss, in other comprehensive income

1. DEFINITION OF INCOME
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 Income is “ increases in assets, or decreases in liabilities, that result in increases in

equity, other than those relating to contributions from holders of equity claims”.
(Conceptual Framework 2020)
Thus, contributions from holders of equity claims are not income, and
distributions to holders of equity claims are not expenses.

Income encompasses both revenue and gains

3.1 Revenue arises in the course of the ordinary activities of an entity.
3.2. Gains – represent other items that meet the definition of income and may, or may not,
arise in the course of the ordinary activities of the enterprise.
Gains include :
 those arising on the disposal of noncurrent assets.
 unrealized gains, such as
 those arising on the revaluation of property
 those arising from exchange differences
 those resulting from increases in the carrying amount of non-current
assets.

Gains that are recognized in the income statement, are usually displayed separately
as knowledge of them is useful for the purpose of making economic decisions.
Gains are often reported net of related expenses.

2. DEFINITION / NATURE OF NET INCOME

a. Definition:
Net income (or net loss) is the excess (or deficit) of revenue over expenses for an
accounting period, which is the net increase (net decrease) in owners’ equity (assets
minus liabilities) of an enterprise for an accounting period from profit-directed
activities that is recognized and measured in conformity with generally accepted
accounting principles.

b. Nature / Characteristics:
1) Net concept- Expenses are deducted from revenue.
2) Change in assets – Net income (net loss) increase (decrease) net assets of an
resulting from its profit-directed activities.
3) Change in owners’ equity - Net income (net loss) increases (decrease) owners’
equity.
4) Periodicity and tentativeness - Income is measured for stated periods of time and
the resulting measurements are tentative before the life of the business is
terminated.

3. RECOGNITION AND MEASUREMENT OF NET INCOME (Income and Expenses)

1) Principle - Determination of periodic net income depends on recognizing changes in
assets and liabilities in the period in which the changes occur, rather than simply on
recording receipts and payments of money

2) Alternative Income (and expense) Recognition Bases

 Accrual basis
 Cash basis
 Modified cash basis
A. Accrual basis
 Underlying concept – Revenues are recognized when realized, i.e. when are sold
or services provided. Expenses are recognized when incurred,. Net income (loss)
for the period is the difference between realized revenues and related expenses.
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 Advantages
i. Accomplishments (revenues) are related to efforts or sacrifices (expenses) so
that reported net income measures an enterprise’s performance during a
period.
ii. More useful in predicting future earnings and cash flows of the enterprise.

 Acceptability – Generally accepted basis of recognizing income and expenses and

required framework of reporting for large, medium-sized or small reporting
enterprises.

B. Cash Basis
 Underlying concept – Revenue is recognized when collected incash, expenses
when paid or settled in cash. Net income (loss) for the period is the difference
between cash received from, and cash disbursed for the firm’s profit-directed
activities.
 Advantages :
 Simplicity
 Estimates and judgments are not required.
 Disadvantage –
 Cash basis is not useful in evaluating enterprise performance as it does
not reflect the results of all profit-directed activities which took place
during the period.
 Cash receipts and payments and the accomplishments and efforts often
occur in different periods.

 Acceptability – Cash basis accounting is not a generally accepted basis of

recognizing net income. It is used only by relatively small business firms and
practicing professionals whose needs are satisfied by simple accounting records.

Important note: The SEC allows micro entities to use Cash basis financial reporting

C. Modified Cash Basis

 Underlying concept – Modified cash basis is a hybrid system of recognizing net
income. Items that materially affect net income such as purchases and sales on
account, inventories, long-lived assets and depreciation are accounted for on an
accrual basis; all other items are recognized on a cash basis.

 Acceptability – Generally used by regulated entities (ex: Cooperatives) and

entities with industry peculiarities

D. Modified accrual basis - This term is sometimes used in place of “modified cash
basis”, particularly in describing the basis of accounting for government funds.
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(COMPARATIVE PRESENTATION BELOW)

PRINCIPLES OF RECOGNITION AND MEASUREMENT OF INCOME AND

EXPENSE UNDER THREE MEASUREMENT BASES (COMPARATIVES)
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CASH BASIS MODIFIED ACCRUAL BASIS

CASH BASIS

INCOME  INCOME INCOME  when earned

when cash is when cash is EXPENSE  when benefits
TRANSACTION received received are received
EXPENSE  EXPENSE
when paid when paid
AR, AP,
MdseInvty.,PPE
1. Cash sales, Cash 100,000 Same Cash 100,000
P100,000 Sales 100,000 Sales 100,000

2. Account sales No entry Accrual view Accts Rec’ble200,000

P 200,000 Sales 200,000
3. Cash purchases, Purchases 90,000 Same Purchases 90,000
P 90,000 Cash 90,000 Cash 90,000

4. Collection on Cash 150,000 Cash 150,000

acct, P150,000 Sales 150,000 Accrual view Accts Rec’ble 150,000
5. Paid salaries, SalariesExp.75,000 Same Salaries Exp. 75,000
P 75,000 Cash 75000 Cash 75,000
6. Account pur - No entry Accrual view Purchases 120,000
chases120,000 Accts Pay. 120,000
7. Payment on Purchases 60,000 Accts Payable 60,000
account Cash 60,000 Accrual view Cash 60,000
purhase,P60,000
8.Purchased Supplies Unused supplies or
Supplies C.O.D Expense.10,000 Cash view Supplies Exp 10,000
P10,000 Cash 10,000 Cash 10,000
9. Bought Eqpt Exp. 50,000 Equipment 50,000
equipment, Cash 50,000 Accrual view Cash 50,000
C.O.D P50,000
10.Received Cash 15,000 Same Cash 15,000
interest Interest Income Interest income
income 15000 15,000
P15,000
11. Rent collected Cash 60,000 Cash 60,000
in advance, Rent Income Cash view Rent income/ or
P 60,000 60,000 Unearned rent
60,000

12. Unpaid No entry Cash view Advert. expense 18,000

advertising Advert. Pay. 18,000
P 18,000
13. Uncoll service No entry Cash view Commiss.rec’ble
income 30,000
P 30,000 Com. Income
30,000
14. Unused No entry Cash view Supplies expense 8,000
supplies, Unused suppl 8,000
P2,000 Unused supplies 2,000
Supplies exp 2,000
15. One-third of No entry Cash view Rent income 40,000
advance collection Unearned rent 40,000
of rent is earned Unearned rent 20,000
Rent income 20,000

16. 10% of No entry Accrual view Bad Debts exp.5,000

accounts Allow for DA 5,000
receivable
outstanding is
uncollectible
17.Unsold mdse by No entry Accrual view Mdse. Invty. 35,000
physical count Inc &Exp.Sum.35,000
P 35,000
18. Equipment life, No entry Accrual view Depreciation 10,000
5 years Acc. Depr 10,000
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HOW MUCH IS NET INCOME : CASH BASIS,MODIFIED CASHACCRUAL BASIS ?

CONCEPTUAL FRAMEWORK LEVEL 2B – INCOME

MODULE 10B
A. MEASUREMENT OF NET INCOME UNDER ACCRUAL BASIS

B. REVENUE
 Nature / Definition / Characteristics /Classification (Types)
 Classification (Types)
 Recognition and of Revenue

C. EXCERPTS FROM PFRS 15 – Revenue from Contracts with Customers (The new
Revenue Standard 2018)
I. MEASUREMENT OF NET INCOME UNDER ACCRUAL BASIS

1) Principle –Net income (loss) for a period is measured by the excess (deficiency)
of revenues over expenses recognized in accordance with accrual accounting
during the period.

2) Transactions Approach in Determination of Net Income

 Net income (net loss) is the excess (deficiency) of revenues over expenses
recognized on an accrual accounting basis during the period.

 The preferred approach, as it shows not only the amount of net income or
loss but also the nature and amounts of revenues and expenses included in
net income. .
3) Steps in Income Measurement -under the transactions approach::
 Revenue – Identify and measure revenues realized during the reporting
period
 Expenses – Measure the expenses incurred to directly or indirectly generate
the realized revenues
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 Net income (loss) – Deduct expenses from revenues to arrive at the net
income or loss for the period.

4) Regular vs. Irregular Components

The elements of net income may be classified as regular and irregular.

- Regular elements are revenues and expenses that can be expected to recur
over time as they are related to the company’s normal operations

- Irregular elements are those that occur infrequently and are not related to
normal operations.

Income from recurring activities is presumably more useful for this purpose than income
from sporadic and infrequent events.
5) Comprehensive Income -
 Comprehensive income comprises all recognized changes in equity (net
assets) of an entity during a period from transactions and other events and
circumstances except those resulting from investments by and distributions to
owners.

 Total comprehensive income and profit and loss are usually used as a measure
of the total performance of the firm. Performance is the relationship of the
income and expenses (both realized and recognized) of an entity during a
reporting period.

II. REVENUE
1. Nature of Revenue
Revenue is income that arises in the course of ordinary activities of an entity
and is referred to by a variety of different names including sales, fees,
interest, dividends and royalties.
2. Characteristics of Revenue
a. Asset inflows

b. Increases Owners’ Equity

c. Gross Concept – In contrast to income, revenue is a gross rather than a
net concept.

3. Sources of Revenue
1) Activities generating revenue:
a. Sale of goods
b. Rendering services
c. Permitting others to use enterprise assets which result in interest, rent,
royalties and dividends
d. Disposing of resources other than products, for example, plant and
equipment or investments in other entities
e. Receipt of government grants and similar transactions (see PAS 20)
f. Forgiveness of indebtedness (see PAS 20)

2) Events giving rise to revenue – Revenue arises primarily from

exchanges.
Occasionally, revenue arises from production, and rarely from non-
reciprocal transfers and from external events other than transfers.

3) Non-revenue events - Revenue does not include:

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 Collection on behalf of third parties like:

 Sales taxes, goods and services taxes and value added tax
 In an agency relationship: collections on behalf of the principal
 Receipts of assets purchased
 Proceeds from borrowing
 Investment by owners
 Adjustments of revenue of prior periods

4) Not revenue transactions

● No revenue is recognized when goods and services similar in nature
(or of no commercial substance) are exchanged.
● No revenue is recognized where an enterprise is a part of an agency
relationship. In this case, the following should apply:

 Amounts collected on behalf of and passed on to the seller are not revenue
of agent.
 The principal in an agency relationship recognizes as revenue the gross
amount charged to the customer. Commission paid is accounted for as
expense.

4. TYPES OF REVENUE TRANSACTIONS

A. Sale of Goods
B. Sale of Service
C. The use by others of entity assets yielding interest, royalties, dividends

Definitions:
“Revenue” is the gross inflow of economic benefits during the period arising in the course of
the ordinary activities of an entity when those inflows result in increases in equity, other than
increases relating to contributions from equity participants.

“Goods” includes goods produced by the entity for the purpose of sale and goods purchased
for resale, such as merchandise purchased by a retailer or land and other property held for
resale.

“Rendering of services” involves the performance by the entity of a contractually agreed

task over an agreed period of time. The services may be rendered within a single period or
over more than one period. Some contracts for the rendering of services are directly related
to construction contracts, for example, those for the services of project managers and
architects.

“Fair value” is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm's length transaction.

5. RECOGNITION OF REVENUE

(1) Recognition Principle

Revenue is recognized when it is probable that future economic benefits will flow to the
entity and these benefits can be measured reliably. (Conceptual Framework)
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● Pervasive Principle
Revenue is generally recognized when both of the following conditions are met:
a) the earning process is complete or virtually complete, and
b) an exchange has taken place.

(2) Broad operating principle – Revenue from exchanges is recorded when products are sold,
services provided, or enterprise resources are used by
others.

(3) Realization principle – Revenue is conventionally recognized as specific point in the

earning process of a business enterprise, usually when assets are sold and services are
rendered. This conventional recognition is the basis for the “realization principle” , i.e.,
the principle governing recognition of revenue

6. MEASUREMENT OF REVENUE
REVENUE SHALL BE MEASURED AT THE FAIR VALUE OF THE CONSIDERATION RECEIVED
OR RECEIVABLE .

KEY POINTS ON REVENUE RECOGNITION

Revenue is recognized as control is passed, either over time (ex:. Sale of service) orat a point
intime. (ex: sale of goods)

An entity recognizes revenue over time if one of the following criteria is met:
 the customer simultaneously receives and consumes all of the benefits provided by the entity
as the entity performs;
 the entity’s performance creates or enhances an asset that the customer controls as the asset is
created; or
 the entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date

If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time.
Revenue will therefore be recognized when control is passed at a certain point in time.
Factors that may indicate the point in time at which control passes include, but are not limited to:
 the entity has a present right to payment for the asset;
 the customer has legal title to the asset;
 the entity has transferred physical possession of the asset;
 the customer has the significant risks and rewards related to the ownership of the asset; and
 the customer has accepted the asset

QUIZZER 1 – NET INCOME

1. The process of identifying, measuring, and relating revenue and expenses of an enterprise for
an accounting period is known as
A. Revenue recognition
B. Realization
C. Income determination
D. Expense recognition
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2. The excess of revenue over expenses for an accounting period, which is the net increase in
owners’ equity of an enterprise from profit-directed activities that is recognized and
measured in conformity with GAAP is
A. Net income
B. Net loss
C. Net gain
D. Net margin

3. Which of the following statements is (are) true?

I. Net loss is the decrease in net assets of a business resulting from its profit-directed
activities.
II. Income is a net or partially net concept determined by deducting expenses from Revenue.
III. Under current GAAP, the net income or loss shown in the Statement of Comprehensive
Income is not the overall measure of the total financial performance of an entity for a
given period of time.
A. Only I is true
B. I and II are true
C. II and III are true
D. I, II and III are true
4. Which of the following best describes “net income” of a business enterprise for an
accounting period?
A. The excess of revenues over expenditures during the period
B. The increase in net assets resulting from all activities during the period
C. The increase in owner’s equity resulting from profit-directed activities during the period
D. The increase in net assets resulting from all its activities during the period, except
transfers between the enterprise and its owner, that is recognized and measured in
conformity with GAAP

5. “Profit-directed activities” generally refer to all activities of an enterprise

A, That give rise to revenue and expenses
B. Including transfers between the enterprise and its owners
C. Except transfers between the enterprise and its owners
D. Except transfers between the enterprise and its owners and prior period adjustments

6. The term “realized income” refers to

A. The recording of revenue at the time cash is received from the sale of a commodity of
service
B. The accounting for income in the period in which it is actually earned
C. The recognition of revenue when there is sufficient objective evidence to determine with a
fair degree of certainty the final
amount to be received from operations
D. The recognition of gain when there is good evidence that an asset has changed in value

7. Which of the following statements is correct?

A. Accrual basis financial statements cannot be prepared from single entry records
B. No adjusting entries are necessary when accounting records are kept on a pure cash basis
C. Modified cash basis of accounting for income and expenses requires adjusting entries
for doubtful accounts expense, depreciation expense and unsold merchandise inventory.
D. Single entry accounting and cash basis of accounting mean the same since both of them
require recording of transaction on the basis of an actual cash flow.
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8. Why is accrual accounting the generally accepted basis for recognizing and measuring net
income?
A. It recognizes non-cash transactions and events affecting net income
B. Data needed for preparing the income statement is more readily
a. available from accounting records
C. The information is more readily understood by users
D. It provides a better indication of enterprise performance than information about current
cash receipts and payments

9. Under modified cash basis accounting, which of the following would most likely be
accounted for on an accrual basis rather than a cash basis?
A. Interest income and expense
B. Salaries and wages
C. Rent expense
D. Long-lived assets and depreciation

10. Under the modified-cash basis accounting, doubtful accounts expense is

A. Recognized in the books because sales on account are recognized as revenue even if not
yet collected
B. Disregarded because sales on account are not recognized until collected in cash
C. Disregarded because sales on account are only allowed when total collection is
ascertained
D. Recognized only when there is definite proof that

11. Jeric V. Corp. reported revenue of P 550,000 in its accrual basis income statement for the
year ended June 30, 2023 additional information was as follows:
Accounts receivable June 30, 2022 P 175,000
Accounts receivable June 30, 2023 265,000
Uncollectible accounts written off during
the fiscal year 6,500
Under the cash basis, of accounting, Villaruz Corp. should report revenue of
A. P 343,500 C. P 453,500
B. P 350,000 D. P 466,500

12. The records for Pereyra Security Services showed the following for 2023:
Jan. 1 Dec. 31
Unearned Service Revenue P 3200 P 4,320
Accrued revenue 2520 1,840
Cash collected during the year for revenue, P 140,000
The amount of revenue under accrual basis is:
A. P 136,840 C. P 139,560
B. P 138,200 D. P 140,000

13. Revenue on the income statement prepared under GAAP by Ferrer Company was P100,000.
Accounts receivable were P4,500 on January 1 and P3,540 on December 31. Unearned
revenue was P1,050 on January 1 and P 1,670 on December 31.
Under cash basis of accounting, how much is revenue for the year?
A. P 101,580
B. P 100,000
C. P 98,000
D. P 89,240

Questions 14 and 15 pertain to the following case:

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Dr. Madeleine, M.D., keeps her accounting records on the cash basis. During 2023, Dr.
Madeleine collected P 360,000 from her patients. At December 31, 2022, Dr. Madeleine had
accounts receivable of
P 50,000. At December 31, 2023, Dr. Madeleine had accounts receivable of P 70,000 and
unearned revenue of P 10,000.

14. Under pure cash basis of accounting, how much was Dr. Madeleine’s patient service revenue
for 2023?
A. P360,000
B. P370,000
C. P410,000
D. P420,000

15. On the accrual basis, how much was Dr. Madeleine’s patient service revenue for 2023?
A. P 310,000
B. P 370,000
C. P 380,000
D. P 390,000

16. The following information is available for Lucris Corporation for 2023:
Disbursements for purchases P 800,000
Decrease in merchandise inventory 20,000
Increase in trade accounts payable 90,000
Costs of goods sold for 2023 under accrual basis is
A. P 690,000
B. P 870,000
C. P 890,000
D. P 910.000

17. The following information is available for Lucris Corporation for 2023:
Disbursements for purchases P 800,000
Decrease in merchandise inventory 20,000
Increase in trade accounts payable 90,000

Assume that Lucris Corporation is using the modified cash basis.

How much is Cost of goods sold for 2023?
A. P 690,000
B. P 870,000
C. P 890,000
D. P 910.000

18. Total comprehensive income includes all changes in equity during a period except
A. Sale of assets other than inventory
B Those resulting from investments by or distributions to owners
C. Sales to a particular entity where ultimate payment by the entity is doubtful
D. Those resulting from revenue generated by a totally owned subsidiary

19. For the year ended December 31, 2023, Rodrigo, Inc. reported the following:
Net income P 115,000
Preference dividends declared 50,000
Ordinary share dividends declared 10,000
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Unrealized holding loss, net of tax 2,000

Retained earnings 75,000
Share capital – Ordinary 650,000
Accumulated Other Comprehensive Income,
Beginning balance 10,000

What would Rodrigo’s report as its ending balance of Accumulated Other Comprehensive
Income?
A. P 12,000
B. P 10,000
C. P 8,000
D. P 2,000

20. These refers to income that arises in the ordinary activities of an entity that is referred to by a
variety of different names including sales, fees, interest, dividends and royalties.
A. Income
B. Expense
C. Revenue
D. Profit

21. Which one of these activities does not generate revenue.

A. Permitting others to use enterprise resources
B. Adjusting of revenue of prior periods
C. Sale of merchandise or services
D. Disposing of investment in other entities.

22. Which of the following statements is (are) false?

I. Revenue and proceeds mean the same.
II. Revenue is the difference between the selling price of a service and the cost of
providing such service
III. Revenue is the change in net assets of an entity during a period that is attributable to
profit-directed activities
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III

23. Which of the following is not a characteristic of revenue?

A. Revenue always increases owner’s equity
B. Revenue represents an inflow of assets into the enterprise
C. Revenue is always a gross rather than a net concept
D. Revenue is always accompanied by an increase in cash.

24. An example of revenue derived from a non-reciprocal transfer is

A. Compensation received as damages in a successful lawsuit
B. Appreciation of property
C. Land acquired by donation
D. Settlement of a liability at less than its book value

25. The term “revenue recognition” conventionally refers to

A. The process of identifying transactions to be recorded as revenue in an accounting period
B. The process of measuring and relating revenue and expenses of an enterprise for an
accounting period.
C. The earning process which gives rise to revenue realization
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D. The process of identifying those transactions that result in an inflow of assets from
customers

26. Generally, revenue should be recognized at a point when

A. Management decides it is appropriate to do so
B. The product is available for sale to the ultimate consumer
C. An exchange has taken place and the earning process is complete or virtually complete
D. An order for a definite amount of merchandise has been received for shipment FOB
destination.

QUIZZER 2 – INCOME/REVENUE / NET INCOME

1. The method of income determination which measures the results of enterprise transactions
and involves the determination of the amount of revenue earned by an entity during a
given period and the amount of expenses applicable to that revenue is known as the
Transactions approach Economic approach
A. YES NO
B. NO YES
C. NO NO
D. YES YES

2. The occurrence that most likely would have no effect on 2023 net income under present
GAAP is the
A. Sale in 2023 of an land contributed by a stockholder in 1995
B. Collection in 2023 of a dividend from an investment acquired in 2015
C. Correction of an error in the financial statements of a prior period discovered
subsequent to their issuance
D. Stock purchased in 2002 was deemed worthless in 2023

3. Dolly Corp. had the following infrequent transactions during 2023:

A P150,000 gain from selling its automotive division.
A P210,000 gain on the sale of investments.
A P 70,000 loss on the write-down of inventories.
In its 2023 income statement, what amount should Leni report as other income and
expense?
A. P 80,000
B. P 140,000
C. P 290,000
D. P 360,000

4. Leila, Inc. incurred the following infrequent losses during 2023:

A P120,000 loss on sale of assets of a discontinued segment A P 50,000
litigation settlement
A P 60,000 loss on impairment of intangible asset
A P 40,000 inventory loss by floods

In its 2020 income statement, what amount should James report as other income and
expense?
A. P 270,000
B. P 150,000
 P a g e | 15

C. P 100,000
D. P 40,000

5. Which one of the following types of losses is excluded from the determination of net income
under present GAAP?
A. A Material losses resulting from transactions in the company’s own shares
B. Material losses from unusual sales of assets not acquired for
C. Material losses resulting from the write-offs of intangibles
D. Material losses of a type not usually insured against, such as those resulting from wars,
riots, and similar calamities

6. The distinction between capital and income is illustrated by

A. Treating gains on sale of treasury stock as additional paid-in capital
B. Excluding corrections of prior years’ profits from current period net income
C. Adopting the current operating performance concept of net income
D. Recognizing income on an accrual basis

7. Revenue is generally recognized when the earning process is complete or virtually complete
and an exchange has taken place. What principle is described by this statement?
A. Consistency
B. Matching
C. Realization
D. Conservatism

8. Gains on assets unsold are identified, in a precise sense, by the term

A. Unrecorded
B. Unrealized
C. Unrecognized
D. Unallocated

9. Revenue ,under proper circumstances may be recognized at all of the following moments in
time EXCEPT
A. After the earning process has been completed and an exchange has taken place
B. Upon the receipt of cash from the customer
C. As certain stages of completion of production are attained
D. When goods are shipped under terms “ sale on approval”

10. Under what condition is it proper to recognize revenues prior to the sale of the merchandise?
A. When the ultimate sale of the goods is at an assured sales price
B. When the concept of internal consistency (of amounts of revenue) must be complied
with.
C. When the revenue is to be reported as an installment sale
D. When management has a long established policy to do so.

11. One method employed to defer revenue recognition is the cost recovery method. Under the
cost recovery method, profit is not recognized until
A. The entire sales price is collected
B. The seller is convinced that collection is assured beyond a reasonable doubt
C. The buyer formally accepts delivery of the merchandise involved in the sale
D. Cash payments by the buyer exceed the seller’s cost of the merchandise sold

12. To address inconsistencies and weaknesses, a comprehensive revenue recognition model

was developed entitled the
A. Revenue Recognition Principle.
B. Principle-based Revenue Accounting.
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C. Rules-based Revenue Accounting.

D. Revenue from Contracts with Customers.

13. The converged standard on revenue recognition

A. reduces the number of disclosures required for revenue reporting.
B. increases the complexity of financial statement preparation.
C. recognizes and measures revenue based on changes in assets and liabilities.
D. simplifies revenue recognition practices across entities and industries.

14. Revenue from a contract with a customer

A. is recognized when the customer receive the rights to receive consideration.
B. is recognized even if the contract is still wholly unperformed.
C. can be recognized even when a contract is still pending.
D. cannot be recognized until a contract exists.

15. The first step in the process for revenue recognition is to

A. determine the transaction price.
B. identify the contract with the customer.
C. allocate the transaction price to the separate performance obligations.
D. identify the separate performance obligations in the contract.

16. Signing of the contract by the two parties is

A. not recorded until one or both parties perform under the contract.
B. recorded at the time the contract is approved by both parties.
C. not recorded until both parties perform under the contract.
D. recorded immediately after the contract is signed.

17. On January 15, 2023, Campos Verdes Company enters into a contract to build custom
equipment for Vista Carpet Company. The contract specified a delivery date of March 15.
The equipment was not delivered until April 30. The contract required full payment of
P75,000 30 days after delivery. This contract should be
A. recorded on January 15, 2023.
B. recorded on March 15, 2023.
C. recorded on April 30, 2023
D. recorded on May 30, 2023.

18. New Age Computers manufactures and sells pagers and radio paging systems which
include a 180 day warranty on product defects. It also sells an extended warranty which
provides an additional two years of protection. On May 10, it sold a paging system for
P3,850 and an extended warranty for another P1,200. The journal entry to record this
transaction would include
A. a credit to Service Revenue of P5,050.
B. a credit to Service Revenue of P1,200
C. a credit to Sales of P3,850 and a credit to Service Revenue of P1,200
D. a credit to Unearned Service Revenue of P1,200.

19. Pia Lansang Company provides service contracts to customers for maintenance of their
electrical systems. On October 1, 2023, it agrees to a four year contract with a major
customer for P 154,000. Costs over the period of the contract are reliably
estimated at P 51,333. Under GAAP, how much revenue should the company recognize in
profit or loss in the year ended December 31, 2023?
A. P 3,208
B. P 9,625
C. P12,833
D. P 38,500
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20. When a customer purchases a product but is not yet ready to accept delivery, this is referred
to as
A. a repurchase agreement.
B a consignment.
C. a principal-agent relationship.
D. a bill-and-hold arrangement

END