ACCT 6010 Module 5 HW

T/F Accounts receivables (net) reported in the current asset section of a company's balance sheet represents the total amount owed by customers within the next year.

False A company makes two representations when reporting A/R in the balance sheet. The first being that it expects to collect the amount reported on the balance sheet. The second is that it expects to collect within the next year. The company may not expect to collect the total amount owed by customers, thus, the statement is incorrect.

T/F Bed Bath and Beyond has a return policy which states that the customer "may return a purchase for a refund, merchandise credit, or exchange to any of our stores nationwide or to our returns processing center". The company can report revenue on the full amount as soon as the merchandise is sold.

False Revenue will be recognized as soon as the merchandise is sold but only for the portion that the company estimates will not be returned. The estimated returns are netted against sales and set up as a liability (reserve).

T/F The financial statement effects for uncollectible accounts occur when the company writes off the account because that is when all the uncertainty is resolved.

False Under GAAP, costs relating to anticipated bad debts expense are matched with sales in the period that the sales are recognized. Upon write-off, both the receivable and the allowance account are reduced, leaving net receivables unchanged.

T/F Revenues from discontinued operations of a company are reported separately from revenues from continuing operations in the income statement.

True A discontinued operation refers to any identifiable business unit that the company intends to sell and represents a strategic shift for the company that has or will have a major effect on a company's financial results. The income (loss) of the discounted operation (net of tax), and the after-tax gain (loss) on sale of the unit, are reported in a separate section of the income statement below income from continuing operations.

T/F According to GAAP revenue recognition criteria, in order for revenue to be recognized on the income statement, it must be earned and realized (realizable).

True According to GAAP revenue recognition criteria, revenue must be both realized (realizable) and earned, to be recognized on the income statement. The issue of when the revenue is earned is subject to professional judgment.

T/F Overestimating the allowance for uncollectible accounts receivable can shift income from the current period into one or more future periods.

True By overestimating current accounts receivable provisions, current income decreases because expenses are increased. However, due to the overestimation, future year provisions will need to decrease to compensate, thus increasing future profitability. Income has been shifted to future periods from the present.

T/F In order to report accounts receivable, net, companies estimate the amount they do not expect to collect from their credit customers.

True Companies must report the amount of accounts receivable that they expect to collect. To do this, they estimate the amount they expect to not collect.

T/F Companies that engage in long-term sales contracts such as construction projects often use the cost-to-cost method to recognize revenue. This means that revenue is recognized in proportion to the project's completion.

True Cost-to-cost method recognizes revenue by determining the costs incurred under the contract relative to its total expected costs and not evenly over time.