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Chapter 6.docx - Chapter 6 Reporting and Analyzing Revenues...

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Chapter 6 Reporting and Analyzing Revenues, Receivables, and Operating Income Learning Objectives – Coverage by Question Mini- Exercises Exercises Problems Cases and Projects LO1 – Describe and apply the criteria for determining when revenue is recognized. 14, 15, 17 27, 28, 33, 40 48, 49 LO2 – Illustrate revenue and expense recognition when the transaction involves future deliverables and/or multiple elements. 17, 24, 25 28, 31, 40, 41 47 48-50 LO3 – Illustrate revenue and expense recognition for long-term projects. 13, 16 29, 30 43 LO4 – Estimate and account for uncollectible accounts receivable. 18-21, 23 34-38 45, 46 50 LO5 – Calculate return on net operating assets, net operating profit after taxes, net operating profit margin, accounts receivable turnover, and average collection period. 20, 22 32, 35, 39 42 50 LO6 –Discuss earnings management and explain how it affects analysis and interpretation of financial statements. 26 33 44 49 LO7 Appendix 6A – Describe and illustrate the reporting for nonrecurring items. 39 42 51 ©Cambridge Business Publishers, 2018 Solutions Manual, Chapter 6 6-1
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QUESTIONS Q6-1. Revenue must be realized or realizable and earned before it can be reported in the income statement. Realized or realizable means that the company’s net assets have increased, that is, the company has received an asset (for example, cash or accounts receivable) or satisfied a liability as a result of the transaction. Earned means that the company has done everything it must do under the terms of the sale. For retailers, like Abercrombie & Fitch, revenue is generally earned when title to the merchandise passes to the buyer (e.g., when the buyer takes possession of the merchandise), because returns can be estimated. For companies operating under long-term contracts, the earning process is typically measured using the percentage-of-completion method , that is, by the percentage of costs incurred relative to total expected costs. Q6-2. Financial statement analysis is usually conducted for purposes of forecasting future financial performance of the company. Discontinued operations are, by definition, not expected to continue to affect the profits and cash flows of the company. Accordingly, the financial statements separately report discontinued operations from continuing operations to provide more useful measures of financial performance and financial income. For example, yielding an income measure that is more likely to persist into the future, and a net assets measure absent discontinued items. Q6-3. Restructuring costs typically consist of two general categories: asset write- downs and accruals of liabilities . Asset write-downs reduce assets and are recognized in the income statement as an expense that reduces income and, thus, equity. Liability accruals create a liability, such as for anticipated severance costs and exit costs, and yield a corresponding expense that reduces income and equity.
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