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Unformatted text preview: CHAPTER 2 COVERAGE OF LEARNING OBJECTIVES LEARNING OBJECTIVES QUESTIONS EXERCISES PROBLEMS OTHER LO1: Explain how accountants measure income. 1,2,3,4,26,27 32 67 LO2: Determine when a company should record rev- enue from a sale. 5,6 31 46,49,51,62 67 LO3: Use the concept of matching to record the expenses for a period. 7,8,9 30,34 45,47,48,50, 52,53,54 LO4: Prepare an income statement and show how it is related to a balance sheet. 10,11,12 35,37,38,39, 40,41 48,50,52, 53,54,55, 56,57,58 65,66,67 LO5: Account for cash dividends and prepare a statement of stockholders equity. 13,14,15,16,28 33,35,38, 39,40 54,57,58 65,66 LO6: Explain how the following concepts affect financial statements: entity, reliability, going concern, materiality, cost-benefit, and stable monetary unit. 17,18 41 59 LO7: Compute and explain earnings per share, price- earnings ratio, dividend-yield ratio, and dividend-payout ratio. 19,20,21,22,29 43,44 60,61 64,66 LO8: Explain how accounting regulators trade off relevance and faithful representation in setting accounting standards (Appendix 2). 23,24,55 63 Chapter 2 Measuring Income to Assess Performance 25 CHAPTER 2 2-1 The operating cycle depends on the nature of the company. It is the time it takes the company to use cash to acquire goods and services, to sell those goods and services to customers, and to collect cash from the sales. 2-2 A fiscal year is the year used for financial reporting. It may be the same as a calendar year, but often it is not. Many companies elect to begin and end a fiscal year at the low point in their annual business activity. 2-3 Expenses are reductions in stockholders equity; thus they may be accurately described as negative stockholders equity accounts. 2-4 The cash basis fails to match accomplishments with efforts. In particular, the cash basis fails to match revenues and expenses properly. Inventory may be bought and paid for in one period, and sold in the second with the collection from customers in a third period. Accrual accounting matches revenue and cost of goods sold in the second period, although the cash outlay was in the first and the collection was in the third. 2-5 The two tests of revenue recognition are earning and realization (realized or realizable). 2-6 Revenue recognition is delayed when a company sells a magazine subscription because the company does not recognize revenue until it is earned by delivery of the magazines. Revenue recognition is also delayed if collection of the account receivable is not reasonably certain, which means that it is not realized or realizable. This may happen with speculative land sales. 2-7 Product costs are naturally linked to revenues, while period costs support a companys operations for a given period. Product costs become expenses when the company recognizes the related revenue. Period costs become expenses in the period in which they are incurred....
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- Spring '11