Unit 10

Question 1

What are revenues? What are the two criteria that permit revenue recognition?

Answer 1

Revenue is generated when a firm sells a product or provides a service to a client or customer and receives cash, creates an account receivable, or satisfies an obligation
Revenue is generally measured by the amount of cash received or expected to be received from a transaction

Revenue is realized when the product or service has been exchanged for cash, claims to cash, or an
asset that is readily convertible to a known amount of cash.
Revenue is earned when the firm has completed, or substantially completed, the activities it must perform to be entitled to the revenue benefits.

Question 2

Describe how cost of goods sold is determined under both perpetual and periodic inventory accounting systems and what are the four cost flow assumptions.

Answer 2

Determining of the cost of goods sold amount is functional to the inventory cost flow assumption (FIFO, etc.) and the inventory accounting system, periodic or perpetual, used to account inventories.
Based on a perpetual system, a record is made of every purchase and every sale.
When an item is sold, its cost (as determined according to the cost of flow assumption) is transferred from the inventory asset to the cost of goods sold expense with the effect on FSs

Periodic Inventory System

Question 3

Explain the significance of gross profit and describe how the gross profit ratio is calculated and used.

Answer 3

Gross profit is the excess of sales over cost of goods sold

Gross profit ratio = Gross profit ÷ Net sales

Question 4

Explain how to calculate a new selling price.

Answer 4

Selling price =
Cost of product ÷ (1 – Desired gross profit ratio)