Question

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

2)

The year-end Year 2 financial statements for Grandier Inc., report net sales of $117,351 million, net operating profit after tax of $4,687 million, net operating assets of $39,502 million. The year-end Year 1 balance sheet reports net operating assets of $42,683 million.

The company’s year-end Year 2 net operating asset turnover is:

Select one:

a. 2.97

b. 2.86

c. 11.9%

d. 11.4%

e. There is not enough information to calculate the ratio.

Answer 1

1. Revenue recognition is a Generally Accepted Accounting Principle that identifies when revenue is exactly recognized. For example, sale and cash received for sale. But there are some complications when there is a time lag between production period and sales period. These are

A. Bonus tied to sales goals--like offering incentives and perks for the goals achieved

B. Long term construction contracts like construction of Aircraft

C. Multiple element sale contracts like technology companies providing hardware, software, upgrades, servicing and warrant all in one which are interdependent

D. Consignment goods

Thus the correct option is E -- all of the above as these create complications in revenue recognition.

2.Formula for operating assets turnover ratio is Net Sales / Net Average Assets

Average assets = (Assets at the beginning of the year + Assets at the ending year) / 2

= ($42,683 + $29,502) / 2 = 82185 / 2 = $41,092.5

Net sales = $117,351

Assets turnover ratio = 117,351 / 41,092.5 = 2.86(rounded of to 2 decimal places)

Net operating profit is not considered here as turnover is based on sales.