Question

The balance sheet includes the following information:

	A.	Information about the firm's past operations
	B.	Information to calculate financial ratios
	C.	Information about the firm's current market value
	D.	A, B, and C
	E.	A and B

When a firm declares dividends:

	A.	Net income decreases and cash decreases
	B.	Retained earnings decreases and cash increases
	C.	Net income decreases and dividend payable increases
	D.	Retained earnings decreases and dividend payable increases
	E.	None of the above

For a firm that provides services, revenue is recognized when:

	A.	The firm receives the purchase order
	B.	The customer pays for the purchase
	C.	Services are rendered to the customer
	D.	The customer signs the service contract
	E.	The firm sends an invoice to the customer

Walmart's 2020 annual report said the following about its gift card sales:

“Customer purchases of gift cards are not recognized as sales until the card is redeemed and the customer purchases merchandise using the gift card.”

When a customer purchases a gift card from Walmart, what impact does this have on Walmart’s financial statements?

	A.	Cash increases and revenue increases
	B.	Cash increases and inventory decreases
	C.	Cash increases and deferred gift card revenue increases
	D.	Cash decreases and revenue decreases
	E.	Cash decreases and accounts payable decreases

Walmart’s 2020 annual report said the following about its gift card sales:

“Customer purchases of gift cards are not recognized as sales until the card is redeemed and the customer purchases merchandise using the gift card.”

When a customer redeems a previously purchased gift card, what impact does this transaction have on Walmart's financial statements?

	A.	Deferred gift card revenue decreases and cash decreases
	B.	Deferred gift card revenue increases and revenue decreases
	C.	Deferred gift card revenue decreases and revenue increases
	D.	Deferred gift card revenue decreases and cash decreases
	E.	Deferred gift card revenue increases and cash increases

Answer 1

1) The balance sheet includes the following information:

Correct answer is B) Information to calculate financial ratios. Financial ratios like Current Ratio, Debt equity ratio are calculated using the balance sheet items.

Reasons why other options are incorrect:

A. Balance sheet does not contain Information about the firm's past operations. It containes information of the current year only

C. Balance sheet records assets and liabilities at the book value according to the Historical Cost concept, not the market values.

2) When a firm declares dividends:

A. Net income decreases and cash decreases

B. Retained earnings decreases and cash increases

C. Net income decreases and dividend payable increases

D. Retained earnings decreases and dividend payable increases

E. None of the above

Correct answer is D. Retained earnings decreases and dividend payable increases. Dividends are paid from the retained earnings of the company so when the dividends are declared, retained earnings are decreased and the dividend to be paid is credited to dividend payable account. When the dividend is paid, dividend payable account is debited and cash is credited.

Reasons why other options are incorrect:

A. When the dividend is declared, it does not result in the outflow of the cash.

B. When the dividend is declared, it does not result in any cash inflow so cash cannot be increased.

C. Dividends are paid out of the retained earnings not the net income of the company.

3) For a firm that provides services, revenue is recognized when:

A.The firm receives the purchase order

B.The customer pays for the purchase

C. Services are rendered to the customer

D.The customer signs the service contract

E.The firm sends an invoice to the customer

Correct answer is C. Services are rendered to the customer. As per the accounting standards, revenue from services is recognised when the services are performed.

Reasons why other options are incorrect:

A. On receiving the purchase order, revenue cannot be recognised as services are yet to be performed.

B.Revenue cannot be recognised on receiving the payment if the services have not been performed yet.

D. On signing the service contract, revenue cannot be recognised as services are yet to be performed.

E. Revenue cannot be recognised on just sending an invoice if the services are not yet performed.

4) Walmart's 2020 annual report said the following about its gift card sales:

Customer purchases of gift cards are not recognized as sales until the card is redeemed and the customer purchases merchandise using the gift card.”

When a customer purchases a gift card from Walmart, what impact does this have on Walmart’s financial statements?

A. Cash increases and revenue increase

B.Cash increases and inventory decreases

C. Cash increases and deferred gift card revenue increases

D. Cash decreases and revenue decreases

E. Cash decreases and accounts payable decreases

The correct answer is C. Cash increases and deferred gift card revenue increases. Since on the sale of gift ccard, only cash is received but goods or services are yet to be transfered to the customer so revenue cannot be recognise until the gift card is redeemed.

Reasons why other options are incorrect:

A. Since revenue is not recognised on the sale of gift card so revenue cannot be increased

B, No goods are transferred on sale of gift card and therefore inventory cannot be decreased.

D. Cash is increased on sale of gift cards and revenue is not recognised.

E. Cash is increased not decreased on sale of gift card and no amount would be recorded in the account payable account.

5)  Walmart’s 2020 annual report said the following about its gift card sales:

“Customer purchases of gift cards are not recognized as sales until the card is redeemed and the customer purchases merchandise using the gift card.”

When a customer redeems a previously purchased gift card, what impact does this transaction have on Walmart's financial statements?

A. Deferred gift card revenue decreases and cash decreases

B. Deferred gift card revenue increases and revenue decreases

C.Deferred gift card revenue decreases and revenue increases

D. Deferred gift card revenue decreases and cash decreases

E.Deferred gift card revenue increases and cash increases

The correct answer is C.Deferred gift card revenue decreases and revenue increases. On sale of gift card, company increases the deferred gift card revenue and when the card is redeemed, deferred gift card revenue is reversed or decreased and revenue is recorded and increased

Reasons why other options are incorrect:

A. No cash inflow or outflow would happen on redemption of gift card.

B. Revenue is increased on redemeption of gift card as goods or services are finally transferred to the consumer.

D.No cash inflow or outflow would happen on redemption of gift card.

E.Deferred gift card revenue increases and cash increases