episode 08 exercise answer 01

Part 1: Solution

The following exercises will test your understanding of the revenue recognition and matching principles.

Let's see how well you answered the questions.

	1.	CanGo's existing products include customizable CDs, which customers can order online with a credit card. As soon as an order is received, CanGo can include it in income.
		Your Answer:
		Correct Answer: False
		Although CanGo has received the cash (the credit card company generally pays CanGo immediately via electronic fund transfers), CanGo has not yet earned the revenue. Only when the customized CD is sent to the customer should CanGo record revenue.

	2.	The amount of revenue that CanGo records for the sale of a book is dependent on the amount of cash that CanGo receives.
		Your Answer:
		Correct Answer: True
		The amount of revenue to be recorded for a transaction is determined by the cash that CanGo receives. It is the timing of the recognition of revenue that is not dependent on cash flow. CanGo may receive the cash before, during, or after the revenue is recorded.

	3.	The matching principle requires that CanGo include on the income statement all revenues related to the expenses shown on that statement.
		Your Answer:
		Correct Answer: False
		In determining what to include on the income statement, the first step is to decide what revenues should be recorded according to the revenue recognition principle. Next, you must determine the expenses used to earn those revenues, so that the matching principle is satisfied. Expenses are matched to revenues, not the other way around.

	4.	If CanGo has no revenues for a period, the matching principle provides that it should not show any expenses for that period.
		Your Answer:
		Correct Answer: False
		The matching principle relates to expenditures directly related to the earning of revenue, such as the cost of goods sold, sales commissions, and shipping expenses. General expenses, such as the president's salary, rent on administrative offices, and general advertising expenditures are shown for the related period whether revenue was earned or not.

	5.	If CanGo correctly matches revenues and expenses, it will always have zero net income.
		Your Answer:
		Correct Answer: False
		Matching refers to the timing of expense recognition, not the amount.

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