Revenue Recognition and Operating Income Test Bank Answers

Module 5

Revenue Recognition

and Operating Income

Module 5: Revenue Recognition and Operating Income

True/False

Topic: Revenue Recognition

LO: 1

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

Topic: Cost-to-Cost Method

LO: 1

2. 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.

Topic: Sales on Consignment

LO: 1

3. A seller, acting as an agent for another company by selling the company’s goods on consignment, recognizes the gross amount of the sale as revenue.

Topic: Revenue Recognition

LO: 2

4. 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.

Topic: Foreign Currency Translation

LO: 4

5. Revenue from a foreign subsidiary will be smaller in U.S. dollars when the dollar strengthens relative to the foreign currency.

Topic: Accounts Receivable

LO: 5

6. 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.

Topic: Collectability of Accounts Receivable

LO: 5

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

Topic: Income Shifting

LO: 5

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

Topic: Bad Debt Expense

LO: 5

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

Topic: Discontinued Operations

LO: 6

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

Topic: Revenue Recognition

LO: 1

1. Which of the following items creates complications related to revenue recognition?

A) Bonuses tied to sales goals

B) Long-term construction contracts

C) Multiple element sales contracts

D) Consignment goods

E) All of the above

Topic: Cost-to-Cost Method (Numerical calculations required)

LO: 1

2. On December 31, 2017, State Construction Inc. signs a contract with the state of West Virginia Department of Transportation to manufacture a bridge over the New River. State Construction anticipates the construction will take three years.

The company’s accountants provide the following contract details relating to the project:

During the three-year construction period, State Construction incurred costs as follows:

State Construction uses the cost-to-cost method to recognize revenue.

Which of the following represent the revenue recognized in 2018, 2019, and 2020?

A) $225 million, $300 million, $2550 million

B) $60 million, $240 million, $120 million

C) $33 million, $198 million, $99 million

D) $78 million, $468 million, $234 million

E) None of the above

Topic: Cost-to-Cost Method (Numerical calculations required)

LO: 1

3. In spring 2017, Parmac Engineering Company signed a $240 million contract with the city of Parkersburg, to construct a new city hall. Parmac expects to construct the building within two years and incur expenses of $180 million. The city of Parkersburg paid $60 million when the contract was signed, $120 million within the next six months, and the final $60 million exactly one year from the signing of the contract. Parmac incurred $72 million in costs during 2017 and rest in 2018 to complete the contract on time.

Using the cost-to-cost method how much revenue should Parmac recognize in 2017?

A) $ 60 million

B) $108 million

C) $ 96 million

D) $180 million

E) None of the above

Topic: Complications of Revenue Recognition

LO: 1

4. Costco Wholesale Corporation collects annual non-refundable membership fees from customers. When should Costco recognize revenue for these membership fees?

A) Immediately when cash is received because the fees are nonrefundable

B) Evenly over the membership year

C) Evenly over the current fiscal year

D) At the end of the membership year when Costco has discharged its obligation to the customer

E) Pro rata over the customer’s actual purchasing pattern

Topic: Revenue Recognition

LO: 1

5. Ticketmaster contracts with the producer of Blue Man Group to sell tickets online. Ticketmaster charges each customer a fee of $9 per ticket and receives $22 per ticket from the producer. Ticketmaster does not take control of the ticket inventory. Average ticket price for the event is $105.

How much revenue should Ticketmaster recognize for each Blue Man Group ticket sold?

A) $9 because the $22 from the producer is similar to a negative cost of goods sold

B) $105 because the $83 is cost of goods sold paid to the Blue Man Group producer

C) $31 because both the fee from the customer and the Blue Man Group producer are earned

D) $114 because the $83 is cost of goods sold paid to the Blue Man Group producer

E) None of the above

Topic: Foreign Currency Translation

LO: 4

6. The 2016 annual report of Leahy Enterprises included the following disclosure:

During fiscal 2016, the U.S. dollar strengthened relative to the other principal currencies in which we transact business with the exception of the Indian rupee.

What effect did these currency fluctuations have on Leahy Enterprises’ 2016 consolidated income statement?

A) Net profit of the Indian subsidiary will be higher

B) Net profit of the Indian subsidiary will be lower

C) Net assets of the subsidiaries that report in the other principal currencies will be higher

D) Net assets of the subsidiaries that report in the other principal currencies will be lower

E) Both A and D

Topic: Allowance for Doubtful Accounts (Numerical calculations required)

LO: 5

7. The 2016 financial statements of Leggett & Platt, Inc. include the following information in a footnote. What are the company’s current gross accounts and other receivables at the end of 2016?

A) $486.6 million

B) $479.4 million

C) $452 million

D) $493.8 million

E) None of the above

Topic: Allowance for Doubtful Accounts (Numerical calculations required)

LO: 5

8. The 2016 financial statements of Leggett & Platt include the accounts receivable footnote:

Total accounts and other receivables at December 31 consisted of the following:

The balance sheet reports total assets of $2,984.1 million at December 31, 2016.

The common-size amount for gross accounts and other receivables are:

A) $486.6 million

B) $493.8 million

C) 16.5%

D) 5.0%

E) None of the above

Topic: Days Sales Outstanding (Numerical calculations required)

LO: 5

9. The 2016 income statements of Leggett & Platt, Inc. reports net sales of $3,749.9 million. The balance sheet reports accounts receivable, net of $486.6 million at December 31, 2016 and $520.2 million at December 31, 2015.

The days sales outstanding in 2016 was:

A) 49 days

B) 10 days

C) 44 days

D) 8 days

E) None of the above

Topic: Bad Debt Expense (Numerical calculations required)

LO: 5

10. The 2017 Form 10-K of Oracle Corporation, for the May 31, 2017 year-end, included the following information relating to their allowance for doubtful accounts: Balance in allowance at the beginning of the year $327 million, accounts written off during the year of $137 million, balance in allowance at the end of the year $319 million.

What did Oracle Corporation report as bad debt expense for the year?

A) $27 million

B) $129 million

C) $118 million

D) $151 million

E) None of the above

Topic: Carrying Amount of Accounts Receivable (Numerical calculations required)

LO: 5

11. At what amount will accounts receivable be reported on the balance sheet if the gross receivable balance is $50,000 and the allowance for uncollectible accounts is estimated at 16% of gross receivables?

A) $6,300

B) $42,000

C) $50,000

D) $28,700

Topic: Uncollectible Accounts

LO: 5

12. Thomas Company receives information that requires the company to increase its expectations of uncollectible accounts receivable.

Which of the following does not occur on the company’s financial statements?

A) Bad debt expense is increased

B) Accounts receivables (gross) is reduced

C) Net income is reduced

D) The allowance account is increased

E) None of the above

Topic: Aging Analysis of Accounts Receivable

LO: 5

13. Heller Corporation has aged its accounts receivable and estimated uncollectible accounts as follows (in thousands). What bad debt expense should the company report for the current period?

A) $ 110 thousand

B) $ 368 thousand

C) $ 6,600 thousand

D) $ 258 thousand

E) There is not enough information to determine the amount.

Topic: Receivables Turnover

LO: 5

14. The 2016 financial statements of BNSF Railway Company report total revenues of $19,829 million, accounts receivable of $1,272 million for 2016 and $1,198 million for 2015.

The company’s accounts receivable turnover for the year is:

A) 17.0 times

B) 8.9 times

C) 16.1 times

D) 17.9 times

E) None of the above

Topic: Research and Development Expenses

LO: 6

15. On its 2016 income statement, Abbott Laboratories reported research and development expense of $1,422,000,000.

Which of the following statements must be true?

A) Abbott Laboratories spent $1,422,000,000 in cash to develop new products and improve old products.

B) Research and development expense reduced Abbott Laboratories 2016 net income by $1,422,000,000.

C) Abbott Laboratories capitalized at least $1,422,000,000 of research and development costs in 2016.

D) The $1,422,000,000 included amortized research and development costs from prior years that were not previously expensed, because Abbott Laboratories incurs such expenses each year.

E) None of the above

Topic: Research and Development Expenses

LO: 6

16. Apple, Inc. reported research and development expense of $10,045 million on its 2016 income statement. This expense included many types of costs.

Which of the following types of costs would not be included in the $10,045 million?

A) Salaries and wages for R&D personnel

B) Costs of applying for FDA approval

C) Depreciation on equipment used in experiments

D) Supplies and inventory related to R&D activities and new-product sales

E) None of the above

Topic: Research and Development Expenses (Numerical calculations required)

LO: 6

17. Apple Inc. and Microsoft Corporation are competitors in the computer industry. Following is a table of Total revenue and R&D expenses for both companies.

Which of the following is true?

A) Apple Inc. is the more R&D intensive company of the two.

B) Apple Inc. has become less R&D intensive over the three years.

C) Microsoft Corporation is less R&D intensive in 2016 than in 2015.

D) Microsoft Corporation is more R&D intensive in 2016 than in 2015.

E) None of the above

Topic: Research and Development Expenses (Numerical calculations required)

LO: 6

18. Intel Corporation reported the following in its 2016 financial statements (in millions):

What is the common-size amount for Intel Corporation’s research and development expense for 2016?

A) 17.4%

B) 21.5%

C) 11.2%

D) 78.5%

E) None of the above

Topic: Assessing Revenue Recognition for Advance Payments

LO: 3

19. McKinnon Enterprises owns a professional ice hockey team, the Rockford Penguins. The company sells season tickets for its upcoming season and receives $960,000 cash. The season starts January 1, 2018, with five home games occurring monthly over the next six months.

What is the balance in the company’s deferred revenue account at the end of April 2018? (Assume the deferred revenue account had a zero balance on January 1, 2018.)

A) $480,000

B) $640,000

C) $960,000

D) $320,000

E) None of the above

Topic: Assessing Revenue Recognition for Advance Payments

LO: 3

20. McKinnon Enterprises owns a professional ice hockey team, the Rockford Penguins. The company sells season tickets for its upcoming season and receives $960,000 cash. The season starts January 1, 2018, with five home games occurring monthly over the next six months.

How much revenue will McKinnon Enterprises recognize from its season ticket sales through the end of April 2018?

A) $480,000

B) $640,000

C) $960,000

D) $320,000

E) None of the above

Topic: Estimating Revenue Recognition with Right of Return

LO: 2

21. Heller Company offers an unconditional return policy to its customers. During the current period, the company records total sales of $850,000, with a cost of merchandise to Heller of $340,000. Based on past experience, Heller Company expects 4% of sales to be returned.

How much in net sales will Heller Company recognize for the current period?

A) $850,000

B) $360,400

C) $816,000

D) $489,600

E) $510,000

Topic: Estimating Revenue Recognition with Right of Return

LO: 2

22. Heller Company offers an unconditional return policy to its customers. During the current period, the company records total sales of $850,000, with a cost of merchandise to Heller of $340,000. Based on past experience, Heller Company expects 4% of sales to be returned.

How much gross profit will Heller Company recognize for the current period?

A) $850,000

B) $360,400

C) $816,000

D) $489,600

E) $510,000

Topic: Revenue Recognition

LO: 1

1. Identify when each of the following companies should recognize revenue.

a. Valero Energy – integrated petroleum company that sells crude oil, natural gas and petroleum and chemical products under short-term agreements at prevailing market prices

b. Boeing – airplane manufacturer whose revenue is derived largely from long-term fixed-price contracts with airlines

c. Wells Fargo – large commercial bank that earns interest on loans

d. Ford Motor Company – manufactures and retails automobiles, provides financing for dealers and customers

Topic: Revenue Recognition Cost-to-Cost Method (Numerical calculations required)

LO: 1

2. On December 31, 2017, Tri-State Construction Inc. signs a contract with the state of West Virginia Department of Transportation to manufacture a bridge over the New River. State anticipates the construction will take three years. The company’s accountants provide the following contract details relating to the project:

During the three-year construction period, Tri-State incurred costs as follows:

Compute the revenue recognized, construction costs expensed, and income earned for each year using the cost-to-cost method.

Topic: Revenue Recognition Multiple Elements Contract (Numerical calculations required)

LO: 1, 3

3. On December 31, 2017, InterTech Corporation, a network solutions company, signs a multi-year contract with Healy, Inc. Under the terms of the contract, InterTech will install hardware and software for Healy and provide software updates and tech support for two years. The total contract price for the solution is $6,750,000. In addition, InterTech will train Healy employees via on-site classes and provide one-on-one training for supervisors and higher level managers. Healy will pay $75 per hour per employee for classes and $375 per hour for one-on-one training. Healy must pay InterTech an upfront fee of $375,000 for the educational package, which will be used to offset educational hours in the future.

How should InterTech Corporation recognize revenue on the $6,750,000 contract? How should InterTech Corporation record the $375,000?

Topic: Revenue Recognition Cost-to-Cost Method (Numerical calculations required)

LO: 1

4. In Spring 2017, Bava Construction signed a contract with the city of Springfield, to construct a new city hall for $200 million. Bava expects to construct the building within two years and incur expenses of $150 million, which means the company earns a $50 million profit on the contract. The city of Springfield paid $50 million when the contract was signed, $100 million within the next six months, and the final $50 million exactly one year from the signing of the contract. Bava incurred $60 million in costs during 2017 and rest in 2018 to complete the contract on time.

Using the cost-to-cost method how much revenue should Bava recognize in 2017? What profit from the Springfield contract, will the company report each year?

Topic: Risk Exposures to Revenue Recognition

LO: 1

5. When should each of the following companies recognize revenue for the following operations? Identify potential revenue recognition issues or risk exposures facing the company:

a. Costco Wholesale Corporation collects annual membership fees from customers.

b. The New York Times receives advertising revenues in advance from Citigroup, for an ad campaign that will run a full-page spread once a week for six months.

c. Zappos is an online clothing and shoe retailer. It receives credit card payments when customers place their orders and ships products from warehouses within 5-7 business days.

d. Ticketmaster contracts with the producer of Blue Man Group to sell tickets online. Ticketmaster charges each customer a fee of $7 per ticket and receives $12 per ticket from the producer. Ticketmaster does not take control of the ticket inventory. Average ticket price for the event is $99.

Topic: Foreign Currency Translation

LO: 4

6. The Bean Import Export Corp. has a profitable Portuguese subsidiary that maintains its financial records in Euros. During the current year, the U.S. dollar strengthened vis-à-vis the Euro. What affect did this have on The Bean’s consolidated income statement for the current year?

Topic: Foreign Currency Translation

LO: 4

7. The 2016 annual report of Murray Corporation included the following disclosure:

During fiscal 2016, the U.S. dollar strengthened relative to the other principal currencies in which we transact business with the exception of the Japanese yen.

Explain the effect on Murray Corporation’s 2016 income statement of the U.S. dollar:

a. weakening vis-à-vis the Japanese yen, and

b. strengthening versus all other currencies.

Assume that Murray Corporation reported a net profit in each of the countries involved.

Topic: Allowance for Doubtful Accounts

LO: 5

8. The 2016 financial statements of Leggett & Platt, Inc. include the following information in a footnote to the financial statements.

What are the company’s gross receivables at the end of 2016 and 2015?

Topic: Allowance for Doubtful Accounts

LO: 5

9. The 2016 balance sheet of Leggett & Platt reports total assets of $2,984.1 million for 2016 and $2,963.7 million for 2015. The financial statements include the following footnote:

Accounts and other receivables at December 31 consisted of the following:

Determine the common-size amount for gross accounts receivable and interpret the year-over-year change in the ratio.

Topic: Days Sales Outstanding

LO: 5

10. The 2016 income statements of Leggett & Platt, Inc., reports net sales of $3,749.9 million in 2016 and $3,917.2 million in 2015. The balance sheet reports accounts and other receivables, net of $486.6 million at December 31, 2016, $520.5 million at December 31, 2015, and $523.3 million at December 31, 2014.

Calculate the average number of days that receivables were outstanding for both years. Explain in layman’s terms, what this ratio means.

Topic: Bad Debt Expense

LO: 5

11. The 2017 Form 10-K of Oracle Corporation, for the May 31, 2017 year-end, included the following information relating to their allowance for doubtful accounts: Balance in allowance at the beginning of the year $327 million, accounts written off during the year $137 million, balance in allowance at the end of the year $319 million.

What did Oracle report as bad debt expense for the year?

Topic: Aging Analysis of Accounts Receivable

LO: 5

12. Heller Corporation has aged its accounts receivable and estimated uncollectible accounts as follows (in millions):

a. Determine the appropriate allowance for uncollectible accounts.

b. How will Heller Corporation report its accounts receivable on the balance sheet?

Topic: Accounts Receivable Write-Off Effects

LO: 5

13. Glendale Sporting Goods reports the following on its 2016 balance sheet:

Company records reveal that Denise Butler owes Glendale Sporting Goods $4,600. Just after 2016 year- end, Denise Butler declares bankruptcy and it becomes clear to Glendale Sporting Goods that the company will not be able to recover any money from Butler.

Indicate how this information affects the balance sheets and income statements in 2016 and 2017.

Topic: Financial Statement Effects of Understating the Allowance Account

LO: 5

14. Dick’s Sporting Goods reported Accounts receivable, net of $75,199 thousand in 2016 and an allowance for doubtful accounts of $3,200 thousand. Pretax income in 2016 was $458,422 thousand. If Dick’s Sporting Goods’ managers had purposely underestimated the allowance for doubtful accounts by $850 thousand, how would the 2016 income statement be affected? What about future financial statements?

Topic: Research and Development Expense (Numerical calculations required)

LO: 6

15. Google reported the following in its 2016, Form 10-K (in millions). Use the information to determine in which year, Google reported a more significant R&D expenditure.

Topic: Research and Development Expenses (Numerical calculations required)

LO: 6

16. Yahoo! reported the following in its 2016 financial statements (in thousands):

a. List three types of costs that Yahoo likely includes in the product development line item on the income statement.

b. What trend do you notice in Yahoo’s spending for product development?

Topic: Research and Development Expenses

LO: 6

17. Apple Inc. and Microsoft Corporation are competitors in the computer industry. Following is a table of R&D expenses and sales revenues for both companies (in $ millions).

a. Compare R&D expenses of the two companies. Which company is more R&D intensive?

b. What trend do you notice in the R&D expense of each company over time?

Topic: Interpreting Revenue Recognition Policy and Recording Revenue

LO: 1

1. Form 10-K of Costco Wholesale Corporation for fiscal year ended August 28, 2016, includes the following footnote (excerpted):

Revenue Recognition

The Company generally recognizes sales, which include shipping fees where applicable, net of returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from members prior to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred sales, included in other current liabilities in the consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated sales returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The sales returns reserve is based on an estimate of the net realizable value of merchandise inventories to be returned. Amounts collected from members for sales or value added taxes are recorded on a net basis.

The Company evaluates whether it is appropriate to record the gross amount of merchandise sales and related costs or the net amount earned. Generally, when Costco is the primary obligor, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, can influence product or service specifications, or has several but not all of these indicators, revenue is recorded on a gross basis. If the Company is not the primary obligor and does not possess other indicators of gross reporting as noted above, it records the net amounts earned, which is reflected in net sales. The Company records related shipping fees on a gross basis.

The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. The Company's Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $750 per year), which can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and corresponding liability (classified as accrued member rewards in the consolidated balance sheets) are computed after giving effect to the estimated impact of non-redemptions based on historical data. The net reduction in sales was $1,172, $1,128, and $1,051 in 2016, 2015, and 2014, respectively.

Continued next page

Required:

a. Explain in layman’s terms how Costco recognizes the cash received from customers who purchase goods or services.

b. What are “sales returns” and how does Costco record them in their financial statements?

c. Explain in layman’s terms how Costco recognizes revenue from annual memberships.

d. On August 28, 2016, Costco collected $2,646 million in membership fees from customers. Use the financial statements effects template that follows to show how Costco would record this transaction and what accounting adjustment Costco would record on November 30, 2016.

e. Costco is contemplating adding a fitness facility to its warehouses—customers would pay a monthly fee to use fitness equipment and take classes. How would Costco record monthly fees from customers if Costco runs the facility itself, that is, Costco purchases all the equipment and the fitness facility is staffed entirely by Costco employees? How would Costco record revenue if the company sub-contracts the fitness facility to a third-party operator and receives a percentage of monthly customer fees from the sub-contractor?

Topic: Foreign Currency Translation

LO: 4

2. Oracle reports the following in footnotes to its 2016 Form 10-K.

Geographic Information

Disclosed in the table below is geographic information for each country that comprised greater than three percent of our total revenues for any of fiscal 2016, 2015 or 2014.

1. Long-lived assets exclude goodwill, intangible assets, equity investments and deferred taxes, which are not allocated to specific geographic locations as it is impracticable to do so.

Required:

a. What proportion of Oracle’s total revenue is potentially exposed to foreign currency risk?

b. Assume that Oracle does not undertake any measures to reduce its foreign currency exposure. If the U.S. dollar strengthens on average 10% vis-à-vis the European currencies in which the company transacts, and weakens 5% relative to the Japanese yen, what will be the impact on revenues in 2016?

c. Explain what steps Oracle can take to reduce its foreign currency risk.

Topic: Accounts Receivable Ratios

LO: 5

3. Leggett & Platt, Inc. reported net sales of $3,749.9 million in 2016 and $3,917.2 million in 2015. The asset side of the balance sheet follows. Use this information to answer the required.

Required:

a. What is the company’s gross amount of receivables at the end of 2016 and 2015?

b. Compute the common-size amount for gross accounts receivable, for both years. Interpret the year-over-year change in this ratio.

c. Compute the allowance for doubtful accounts to gross accounts receivable, for both years. Interpret the year-over-year change in this ratio.

d. Based on the ratios you calculated, form an opinion about the quality of the company’s accounts receivable.

Topic: Accounts Receivable Turnover and Average Collection Period

LO: 5

4. The asset side of the 2016 balance sheet for Leggett & Platt (a furniture manufacturer) follows. The company reported net sales of $3,749.9 million in 2016 and $3,917.2 million in 2015. Use this information to answer the requirements:

Table continued next page

Table continued

Required:

a. Compute the accounts receivable turnover for 2016 and 2015. At December 31, 2014, accounts and other receivables, net were $523.3 million.

b. Compute the days sales outstanding (DSO) for each year.

c. Does the number of days to collect receivables seem appropriate for Leggett & Platt?

d. How could Leggett & Platt improve its accounts receivable turnover?

Topic: Accounts Receivable Turnover and Average Collection Period

LO: 5

5. The asset side of the 2017 balance sheet for Oracle Corporation is below. The company reported total revenues of $37,728 million in 2017 and $37,047 million in 2016. Use this information to answer the required.

Required:

a. What is the company’s gross amount of receivables at the end of 2017 and 2016?

b. Compute the common-size amount for gross accounts receivable, for both years. Interpret the year-over-year change in this ratio.

c. Compute the allowance for doubtful accounts to gross accounts receivable, for both years. Interpret the year-over-year change in this ratio.

d. Based on the ratios you calculated, form an opinion about the quality of the company’s accounts receivable.

Topic: Accounts Receivable Turnover and Average Collection Period

LO: 5

6. The asset side of the 2016 balance sheet for BURLINGTON NORTHERN SANTA FE, LLC (BNSF) is below. The company reported total revenues of $19,829 million in 2016 and $21,967 million in 2015.

Required:

a. What proportion of gross accounts receivable does BNSF record as an allowance each year? Interpret the year-over-year change in the ratio.

b. Calculate the common-size amount for accounts receivable, net, for 2016 and 2015.

c. Compute the accounts receivable turnover for 2016 and 2015. At December 31, 2014, accounts and other receivables, net were $1,386 million.

d. Does the accounts receivable turnover you calculated above, seem reasonable for a railway company? Explain.

Topic: Research and Development Expenses

LO: 6

7. Following are the 2016 income statements for Apple Inc. and Microsoft Corporation, competitors in the computer industry. Use these financial statements to answer the required.

Continued next page

Required:

a. How do Apple Inc. and Microsoft Corporation account for R&D expenditures?

b. Apple Inc.’s and Microsoft Corporation’s R&D expense includes many different types of costs. List three specific costs included in R&D expense on the income statement.

c. Compare R&D expenses of the two companies. (Hint: determine the common-size R&D amounts. Consider both direct R&D expenses as well as acquired R&D.)

d. What trend do you notice in the R&D expenses of each company over time?

Topic: Revenue Recognition Timing and Determination

LO: 1

1. Discuss when each of the following types of businesses should likely recognize revenue:

a. A software company such as Microsoft when significant production, modification, or customization does not exist.

b. A clothing retailer like Neiman Marcus.

Topic: Revenue Recognition

LO: 1

2. Why would a company deliberately report sales on consignment as gross instead of at the net amount. Explain why you believe this is or is not a fair method of reporting revenue this way.

Topic: Cost-to-Cost Method

LO: 1

3. When is the cost-to-cost method an appropriate method to recognize revenues. What are some of the potential risks associated with this practice?

Topic: Foreign Currency Fluctuations

LO: 4

4. What effect, if any, does a strengthening of the dollar have on reported sales and net income for companies operating outside the United States, when those foreign operations are translated to U.S. dollars for consolidation purposes?

Topic: Income Shifting with Receivables

LO: 5

5. How do companies use accounts receivables to shift income? Explain why managers engage in this sort of activity.

Topic: Receivables Turnover and Days Sales Outstanding

LO: 5

6. Define the accounts receivable turnover and the days sales outstanding ratios. What do these ratios tell us about a company’s accounts receivable?