CHAPTER 4
UNDERSTANDING INCOME STATEMENTS
SOLUTIONS
1. C is correct. IAS No. 1 states that expenses may be categorized by either nature or function.
2. C is correct. Cost of goods sold is a classification by function. The other two expenses represent classifications by nature.
3. C is correct. Gross margin is revenue minus cost of goods sold. A represents net income and B represents operating income.
4. B is correct. Under IFRS, income includes increases in economic benefits from increases in assets, enhancement of assets, and decreases in liabilities.
5. B is correct. Net revenue is revenue for goods sold during the period less any returns and allowances, or $1,000,000 minus $100,000 = $900,000.
6. C is correct. The preferred method is the percentage-of-completion method. The completed contract method should be used under U.S. GAAP only when the outcome cannot be measured reliably. A method similar to, but not referred to as, the cost recovery method is used under IFRS when the outcome cannot be measured reliably.
7. A is correct. Under the completed contract method, no revenue would be reported until the project is completed.
8. A is correct. The installment method apportions the cash receipt between cost recovered and profit using the ratio of profit to sales value (i.e., $3,000,000 ÷ $5,000,000 = 60 percent). Argo will, therefore, recognize $600,000 in profit for 2009 ($1,000,000 cash received × 60 percent).
9. A is correct. Under the cost recovery method, the company would ...
