Financial Accounting and Information Systems
Exam 2
Fall 2010

True/False (1 point)

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).T

2) Realized gains and losses on investments classified as trading securities are reported in a company's net income in the period that they are realized.

3) Accounts receivable (net) reported in the current asset section of a company's balance sheet represents the total amount owed by customers within the next year. F

4) In 2009, Dow Chemical Corporation plans to build a laboratory dedicated to a special project. The company will not use the laboratory after the project is finished. Under GAAP, this laboratory should be expensed.

5) Unearned revenue, a current operating liability, arises when a company receives cash before any goods are delivered or services are rendered. T

6) Contingent liabilities that are "probable" can be reasonably estimated are recorded on the balance sheet as a liability and as an expense in the income statement. T

7) For an item to be classified as extraordinary, it needs to be both unusual and infrequent. However, there is an exception for material items - for one-time items that are extremely large, firms have the option of classify these items as extraordinary to provide better information to investors.

8) LIFO inventory costing yields more accurate reporting of the inventory balance on the balance sheet.F

9) Available-for-sale is the only classification that requires fair-value accounting.F

10) For tax purposes, companies typically transfer more of the asset's cost from the balance sheet to the income statement in the earlier years of the asset's life. This is called accelerated depreciation and it is a benefit to the company. Thus, companies record deferred tax