Sales Returns
Which of the following statements is true relating to theallowance for sales returns?
a. Sales returns is treated as an expense in the incomestatement and, therefore, reduces profit for the period.
b. An excess of the amount by which the allowance for salesreturns is increased compared with the actual returns for theperiod indicates the company may have inflated profit for theperiod.
c. The amount by which the allowance for sales returns isreduced during the period is recognized as a reduction of sales forthe period, thus reducing profts.
d. Increasing the allowance for sales returns by an amount thatis less than the actual returns recognized for the period mayindicate either the company is attempting to increase profit forthe period or its estimates that less of its products will bereturned in the future.
Deferred Revenue
True or false: A reduction of the deferred revenue account can beinterpreted as a leading indicator of lower future revenues.Explain
a. Fale. Revenue is recognized when the deferred revenueliability increases. If the deferred revenue account has decreased,more cash came in from customers and more revenue will be recgnizedin the future.
b. True. Revenue is recognized when the deferred revenueliability decreases. If the deferred revenue account has decreased,less cash came in from customers and less revenue will berecognized in the future.
c. False. Revenue is recognized when the deferred revenueliability decreases. If the deferred revenue account has decreased,less cash came in from customers and more revenue will berecognized in the future.
d. True. Revenue is recognized when the deferred revenueliability decreases. If the deferred revenue account has decreased,more cash came in from customers and less revenue will berecognized in the future.
Foreign Exchange Effects onSales
True or false: A multinational company reports that a large amountof its sales is generated in foreign currencies that havestrengthened vis-à-vis the $US. Consolidated revenues are likelylower than would have been reported in the absence of such a shiftin exchange rates.
a. False. Strengthening foreign currencies implies a weakening$US. As the $US weakens, foreign currencies purchase less $US,resulting in an decrease in foreign currency-denominated sales,expense and profit. Consolidated revenues will therefore, likely behigher.
b. True. Strengthening foreign currencies implies a weakening$US. As the $US weakens, foreign currencies purchase less $US,resulting in an decrease in foreign currency-denominated sales,expense and profit. Consolidated revenues will therefore, likely belower.
c. False. Strengthening foreign currencies implies a weakening$US. As the $US weakens, foreign currencies purchase more $US,resulting in an increase in foreign currency-denominated sales,expense and profit. Consolidated revenues will therefore, likely behigher.
d. True. Strengthening foreign currencies implies a weakening$US. As the $US weakens, foreign currencies purchase less $US,resulting in an increase in foreign currency-denominated sales,expense and profit. Consolidated revenues will therefore, likely belower.
