ACC 100 Lecture Notes - Lecture 3: Natural Disaster, Retained Earnings, Financial Statement

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30 Apr 2015

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External event involves interaction between the entity and its environment. Internal event an event that occurs entirely within the entity. Transaction any event that is recognized in a set of financial statements. Usually involves two types of events: an external event that involves exchange of assets and liabilities between the entity and external parties. Examples: paying a monthly utility bill, selling merchandise to a customer, or issuing shares to new shareholders: an internal event, where the effects on the entity can be reliably measured. Examples: materials and equipment to manufacture a product, incurring losses due to natural disaster, or accruing interest in a bank loan. Source document a piece of paper that is used as evidence to record a transaction; the original record transaction. *at the end of the journal entry, the assets must equal to the sum of liabilities and shareholder"s equity, otherwise there is an error(s) in the transactions.

Related Questions

Identify two categories of revenue for Panera Bread from the table in the article Revenue Recognition: Key differences between U.S. GAAP and IFRSs. Compare and contrast the companyâs current U.S. GAAP revenue recognition with the potential adoption of IFRS. Provide the IASB Framework or the IAS statement, the changes in revenue recognition as well as potential challenges the company may face in adoption.

Table:

Subject	U.S. GAAP	IFRSs
Concept/objective	realized or realizable and earned.	According to paragraph 83 of the IASB's Framework for the Preparation and Presentation of Financial Statements, revenue is recognized when (1) "it is probable that any future economic benefit" will flow to the entity and (2) such a benefit can be measured reliably. Further, paragraph 93 of the IASB Framework indicates that revenue normally must be earned before it can be recognized.
Definition of revenue	Paragraph 78 of FASB Concepts Statement No. 6, Elements of Financial Statements, defines revenue as "inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations."	Paragraph 74 of the IASB Framework states, "The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent." Paragraph 7 of IAS 18 defines revenue as "the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants."
Sale of goods or products	SAB Topic 13 indicates that revenue from the sale of goods or products should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Delivery has occurred (e.g., an exchange has taken place). The sales price is fixed or determinable. Collectibility is reasonably assured. In addition, ASC 605-15 provides guidance on product transactions that include a right of return. Further, various industry- and transaction-specific guidance is provided in other U.S. GAAP.	Under paragraph 14 of IAS 18, revenue from the sale of goods is recognized if all of the following conditions are met: The "entity has transferred to the buyer the significant risks and rewards of ownership of the goods." The "entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold." The "amount of revenue can be measured reliably." "[I]t is probable that the economic benefits associated with the transaction will flow to the entity." The "costs incurred or to be incurred in respect of the transaction can be measured reliably."
Rendering services	>Like revenue from product sales, revenue from service transactions should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Service has been rendered. The sales price is fixed or determinable. Collectibility is reasonably assured. Other than the limited guidance in >ASC 605-20, no specific guidance on the rendering of services exists under U.S. GAAP. The appropriate method for recognizing revenue in such transactions depends on the individual transaction but is usually based on the proportional performance as of the balance sheet date.	Paragraph 20 of IAS 18 states, "When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage [i.e., percentage] of completion of the transaction at the balance sheet date." Paragraph 20 goes on to list specific conditions for determining whether an outcome of a transaction can be estimated reliably. And subsequent paragraphs provide guidance on determining the stage of completion. Paragraph 26 of IAS 18 states, "When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable."
Software arrangements	ASC 985-605 provides guidance on recognizing revenue in a software arrangement.	There is no specific guidance on software revenue recognition in IFRSs. An entity should apply the provisions of IAS 18 as appropriate.
Construction-type contracts	ASC 605-35 provides guidance on construction-type contracts. ASC 605-35-25-90 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when dependable estimates cause the outcome to be doubtful), the completed-contract method is preferable. ASC 605-35-25-25 through 25-27, the customer must approve the scope and price of change orders before the related revenue can be recognized.	IAS 11, Construction Contracts, provides guidance on construction-type contracts. Paragraph 32 of IAS 11 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when the outcome of the contract cannot be estimated reliably), revenue is recognized to the extent that costs have been incurred, provided that the costs are recoverable. Use of the completed-contract method is prohibited under IFRSs. Paragraph 13 of IAS 11 specifies that when it is probable that the customer will approve the scope and price of a change order, the related revenue can be recognized.
Milestone method	ASC 605-28 provides guidance on the application of the milestone method for recognizing revenue in research or development arrangements.	There is no specific guidance in IFRSs on the application of the milestone method for recognizing revenue in research or development arrangements.
Multiple-element arrangements	ASC 605-25 provides guidance on multiple-element revenue arrangements and establishes detailed criteria for determining whether each element may be separately considered for recognition. This guidance does not apply to arrangements or deliverables that are within the scope of other authoritative literature (e.g., ASC 985-605).	Paragraph 13 of IAS 18 indicates that the recognition criteria under IAS 18 are usually applied separately to each transaction unless either of the following conditions applies: "[I]t is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction." Two or more transactions "are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole."
Bill-and-hold arrangements	The SEC staff lists specific criteria that must be met for revenue to be recognized in bill-and-hold arrangements before delivery of the product. (Non-SEC entities also use these revenue recognition criteria because no other authoritative guidance in U.S. GAAP addresses the accounting for these transactions.) The criteria restrict revenue recognition to limited circumstances.	Illustrative Examples to IAS 18 list criteria for recognizing revenue under bill-and-hold arrangements before delivery of the product. While the objective for recognizing revenue in bill-and-hold arrangements may be similar to that in U.S. GAAP, the criteria are not the same.
Gross versus net	ASC 605-45 provides guidance on whether to report revenue on the basis of the gross amount billed to the customer (as a principal) or the net amount retained by the company (as an agent).	Paragraph 8 of IAS 18 requires that revenue be reported on a net basis in agency relationships but does not provide specific guidance to consider. Improvements to IFRSs issued in April 2009) provides examples that indicate whether an entity is acting as a principal or as an agent.
Customer loyalty programs	Revenue recognition for customer loyalty programs is not specifically addressed in U.S. GAAP. (The EITF attempted to address this issue but did not reach a consensus.) Although entities account for customer loyalty programs in different ways, such programs are typically accounted for under ASC 605-25 as multiple-element arrangements or under an incremental-cost model.	IFRIC 13 indicates that customer loyalty programs are deemed multiple-element revenue transactions and that the fair value of the consideration received should be allocated between the components of the arrangement.
Rebates, discounts, incentives, and other consideration	ASC 605-50 indicates that consideration given by an entity to its customers is presumed to be a reduction of revenue unless an identifiable benefit whose fair value can be reasonably estimated is received.	Paragraph 10 of IAS 18 states that revenue "is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity." There is no specific guidance on other types of consideration given by an entity to its customers.
Specific industry and other guidance	Certain standards in U.S. GAAP provide specialized guidance on revenue recognition, including guidance that applies to specific industries and transactions.	IFRSs provide no (or limited) revenue recognition guidance that applies to specific industries or transactions.

greyhornet170

Regulations are

	A. equal in authorityto legislation if statutory
	B. equal in authorityto legislation
	C. presumed to bevalid and to have almost the same weight as the IRC
	D. equal in authorityto legislation if interpretative

2) Which of the followingstatements regarding proposed regulations is not correct?

	A. Practitioners andother interested parties may comment on proposed regulations.
	B. Proposedregulations expire after 3 years.
	C. Proposed andtemporary regulations are generally issued simultaneously.
	D. Proposedregulations do not provide any insight into the IRS'sinterpretation of the tax law.

3) Identify which of thefollowing statements is false.

	A. Members from boththe House and the Senate are on the Conference Committee.
	B. When tax advisorsspeak of the tax law, they usually have in mind just the InternalRevenue Code.
	C. Records ofcommittee hearings are helpful in determining Congressionalintent.
	D. All arefalse.

4) Which of the followingstatements about a partnership is true?

	A. Partners are taxedon distributions from a partnership.
	B. A partnership is ataxpaying entity.
	C. Partners are taxedon their allocable share of income whether it is distributed ornot.
	D. Partners areconsidered employees of the partnership.

5) Which of the followingstatements is incorrect?

	A. The number of Scorporation shareholders is unlimited.
	B. S corporationsmust allocate income and expenses to their shareholders based ontheir proportionate ownership interest.
	C. S corporationincome is taxed to shareholders when earned.
	D. S corporationlosses can offset shareholder income from other sources.

6) Which of the followingstatements is incorrect?

	A. Limited partners'liability for partnership debt is limited to their amount ofinvestment.
	B. In a generalpartnership, all partners have unlimited liability for partnershipdebts.
	C. In a limitedpartnership, all partners participate in managerialdecision-making.
	D. All of thestatements are correct.

7) Three members form an LLC inthe current year. Which of the following statements is incorrect?

	A. The LLC can electto have its default classification ignored.
	B. The LLC's defaultclassification under the check-the-box rules is as apartnership.
	C. The LLC can electto be taxed as a C corporation with no special taxconsequences.
	D. If the LLC electsto use its default classification, it can elect to change itsstatus to being taxed as a C corporation beginning with the thirdtax year after the initial classification.

8) Identify which of thefollowing statements is false.

	A. Under thecheck-the-box regulations, an LLC that has only two members(owners) must be taxed as a partnership.
	B. The check-the-boxregulations permit an LLC to be taxed as a C corporation.
	C. A business neednot be incorporated under state or federal law to be taxed as acorporation.
	D. Once an electionis made to change its classification, an entity cannot change againfor 60 months.

9) Identify which of thefollowing statements is true.

	A. The check-the-boxregulations permit an LLC to be taxed as a C corporation.
	B. Under thecheck-the-box regulations, an LLC that has only two members(owners) default classification is as a partnership.
	C. Once an electionis made to change its classification, an entity cannot change againfor 60 months.
	D. All of thestatements are true.

10) For Sec. 351 purposes theterm property does not include

	A. accountsreceivable
	B. cash
	C. inventory
	D. servicesrendered

11) Identify which of thefollowing statements is true.

	A. The exchange ofstock for services rendered is not a taxable transaction.
	B. The repeal of Sec.351 would result in more existing businesses beingincorporated.
	C. Section 351 wasenacted to allow taxpayers to incorporate without incurring adversetax consequences.
	D. All arefalse.

12) Barry, Dan, and Edithtogether form a new corporation; Barry and Dan each contributeproperty in exchange for stock. Within 2 weeks after the formation,the corporation issues additional stock to Edith in exchange forproperty. Barry and Dan each hold 10,000 shares and Edith willreceive 9,000 shares. Which transactions will qualify fornonrecognition?

	A. Only the secondtransaction will qualify for nonrecognition.
	B. Only the firsttransaction will qualify for nonrecognition.
	C. Because of thestep transaction doctrine neither transaction will qualify.
	D. Both transactionswill qualify under Sec. 351 if they are part of the same plan ofincorporation.

peararmadillo631

(ACCOUNTING INFORMATION SYSTEM)

Business scenario:

The model enterprise in this study is Euphoria Event Management Company (EEMC). As one of the major players in the event management industry, it provides a one-stop wedding service, organizes birthday parties, manages various kinds of celebrations and thus offers catering services based on the requirements of the customers. Due to this, the company handles multiple food inventory sales and purchases transactions and often slipped off the appropriate tracking and consumption of costs. Moreover, since it is classified as SME (small to medium-sized enterprise), it often fails to appreciate the importance of internal control in its daily operations.

The revenue cycle system at EEMC

The steps and procedures implemented within the revenue cycle of the company can generally be explained as follows:

1) Sales executive receives customer order by phone, fax or from a meeting.

2) She forwards the customer order to the kitchen department with details on quantities of food inventory needed and the date of delivery to customer.

3) The kitchen supervisor issues a Sales Order or sometimes a Packing Slip for the food order. Using this document, EEMC delivers the goods to customer.

4) Upon receiving the food, customer stamps and signs the Sales Order/Packing Slip.

5) One month after the delivery date, the accounts clerk at EEMC bills the food with Sales Invoice (stamp-duty receipt with authorized signature). The customer takes the original invoice while the company gets the copy of invoice and stamped receipt generated by the customer.

6) Two month after the delivery date, the accounts clerk makes a courtesy call to customer on the payment due.

7) Customer makes payment either using a cheque/clearing deposit slip or via a bank transfer.

8) As evidence of payment, the accounts clerk requests the original payment document (receipts or cheque stub) from

the customer or just check the transaction from the bank statements.

9) The accounts clerk records the sales transaction and the amount of sales in the general ledger. She also keeps the revenue cycle related documents as proof of the transaction.

The expenditure cycle system at EEMC

The steps and procedures implemented within the revenue cycle of the company can generally be explained as follows:

1) EEMC sets the budget for inventory purchase.

2) The Bill of Materials/Purchase Requisition document is created.

3) The procurement officer invites interested suppliers to quote their inventory price.

4) The procurement officer compares the quotation (price) of inventory among the various suppliers and appoints the

supplier who offers lowest price that commensurate with the desired quality of food. Appointment is usually conveyed by phone or fax.

5) When the food inventory arrives at the warehouse, the accounts clerk checks the quantity and the quality of inventory to confirm the order with the Bill of Materials.

6) Next, the supplierâs invoice (no Packing Slip from supplier, so the inventory is delivered with the invoice) is signed and the copy is taken and kept at the accounts department.

7) Between one to two weeks after the receipt of inventory, the accounts clerk confirms and pays for the purchases via a bank transfer. EEMC keeps the original receipt.

8) The accounts clerk records the purchase transaction and the amounts of obligation paid in the general ledger. She also keeps the expenditure cycle related documents as proof of the transaction.

Instructions:

1. Evaluate and comment on the internal control system related to the revenue cycle and expenditure cycle of the company. For each of the cycle, your answers must relate to the organizational control, documentation control and management practice control.

2. Using your own knowledge and creativity, suggest at least 3 ways to strengthen the documentation process and procedures using only the limited information given above.

3. Provide specific recommendations on how to overcome the discovered potential weaknesses on the organizational structure and authority of the company.

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ACC 100 Lecture Notes - Lecture 3: Natural Disaster, Retained Earnings, Financial Statement

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