Texas A&M University ACCT 5315 Quiz 4 Module 5 Review. Questions, Answers and Rationale.

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Quiz 4 (Module 5) Question 1 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. Apple Inc. Mi... crosoft Corporation (in millions) Total revenue R&D expenses 2016 2015 2014 2016 2015 2014 $215,639 $233,715 $182,795 $85,320 $93,580 $86,833 $11,988 $12,046 $11,381 $10,045 $8,067 $6,041 Which of the following is true? Select one: 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 Feedback To make comparisons, we need to determine the common size amount for the R&D expenditures of both firms by scaling by total revenues. Apple Inc. Microsoft Corporation 2016 2015 2014 2016 2015 2014 Common size R&D 4.66% 3.45% 3.30% 14.05% 12.87% 13.11% Microsoft Corporation spends proportionately more on R&D than Apple Inc. Microsoft Corporation is more R&D intensive. Apple Inc. has spent more on R&D (and increased the percentage spent) in 2016 than in 2015 and 2014. Microsoft Corporation increased R&D from 12.87%% in 2015 to 14.05% in 2016. Thus, A, B, and C are not true. Microsoft Corporation is more R&D intensive in 2016 than in 2015. Question 2 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? Select one: 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 Feedback R&D expenses exclude any costs related to sales. Supplies and inventory related to R&D activities and new-product sales Question 3 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: Select one: A. 17.0 times B. 8.9 times C. 16.1 times D. 17.9 times E. None of the above Feedback Receivables turnover = Sales / Average AR = $19,829 / [($1,272 + $1,198) / 2] = 16.1 times per year. 16.1 times Question 4 The 2016 financial statements of Leggett & Platt include the accounts receivable footnote: Total accounts and other receivables at December 31 consisted of the following: (in millions) 2016 2015 Total accounts and other receivables $493.8 $529.5 Allowance for doubtful accounts Total accounts and other receivables, net (7.2 ) $486.6 (9.3 ) $520.2 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: Select one: A. $486.6 million B. $493.8 million C. 16.5% D. 5.0% E. None of the above Feedback $493.8 / $2,984.1 = 16.5% 16.5% Question 5 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? Select one: A. $ 27 million B. $129 million C. $118 million D. $151 million E. None of the above Feedback Balance in allowance at the beginning of the year + bad debt expense – accounts written off during the year = balance in allowance at the end of the year. Bad debt expense = $319 million – $327 million + $137 million = $129 million. $129 million Question 6 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? Select one: 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 Feedback Ticketmaster should record $31 revenue each time it sells a ticket. Of that, $9 will be received in cash and $22 will be recorded as receivable from the Blue Man Group producers. $31 because both the fee from the customer and the Blue Man Group producer are earned Question 7 Which of the following items creates complications related to revenue recognition? Select one: A. Bonuses tied to sales goals B. Long-term construction contracts C. Multiple element sales contracts D. Consignment goods E. All of the above Feedback Each of these types of revenue or business conditions creates risk associated with revenue recognition. Each requires good internal controls to prevent and detect inappropriate revenue recognition, as well as extra management vigilance and auditor care. All of the above Question 8 Costco Wholesale Corporation collects annual non-refundable membership fees from customers. When should Costco recognize revenue for these membership fees? Select one: A. Evenly over the membership year B. Evenly over the current fiscal year C. At the end of the membership year when Costco has discharged its obligation to the customer D. Immediately when cash is received because the fees are nonrefundable E. Pro rata over the customer's actual purchasing pattern Feedback Costco should record membership fees evenly over the year even if the fee is nonrefundable because Sam's has an obligation to stay open for business for a year to honor the customer's membership. Evenly over the membership year Question 9 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? Select one: A. $480,000 B. $640,000 C. $960,000 D. $320,000 E. None of the above Feedback Deferred revenue recognized: ($960,000 / 6 months) x 4 months = $640,000 $640,000 Question 10 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? Select one: 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 Feedback Abbott Laboratories included in research and development expense certain non-cash expenses such as depreciation on related assets, thus (A) is not correct. Abbott Laboratories recorded deferred tax expense on the product development expense, thus net income was affected on an after-tax basis and (B) is therefore not correct. Under US GAAP, firms may not capitalize R&D costs, thus (C) is not correct. All R&D expenses must be included in the income statement in the period, thus (D) is wrong. None of the above [Show More]

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