ACC 100 Lecture Notes - Lecture 5: Gross Margin, Income Statement

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30 Apr 2015

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Chapter 5 - income measurement and the income statement. Revenues increases in economic resources result from ordinary activities such as the sale of goods, the rendering of services, or the use by others of the entity"s resources. Revenue recognition principle revenues are recognized in the income statement when they are earned: methods that are often used: manufactured goods and merchandise, long-term contracts, franchises, commodities, installment sales, and rent and interest. Time-of-sale method method used by merchandising and manufacturing industries to recognize revenue when goods are sold. Percent-of-completion method method used by contractors to recognize revenue before the completion of a long-term contract. Production method method in which revenue is recognized when a commodity is produced rather than when it is sold; revenue recognized before a sale takes place. Installment method method in which revenue is recognized at the time cash is collected, essentially a cash basis of accounting; revenue recognized after a sale takes place.

Related Questions

Two first year accounting associates are discussing the timingof revenue recognition for long-term construction contracts, andmore specifically, discussing which method best reflects thepoint-of-sale/delivery. One associate, Taylor, believes recognizingrevenue at the time of completion is the preferred method and mostlike point-of-sale/delivery revenue recognition.

The other associate, Alex, believes recognizing the revenue overtime is the preferred method because revenue is recognized as timeprogresses (as portions of the contract are completed), and therevenue can be reported sooner.

Do you agree with Taylor or with Alex? Explain why you agreewith that associate.

I. True/False 2 points

Indicate whether the sentence or statement is true or false.

____ 1. Revenues and gains are generally recognized when they are realized or realizable and they have been earned through substantial completion of the activities involved in the earnings process.

____ 2. The proportional performance method has been developed to reflect revenue earned on service contracts under which many acts of service are to be performed before the contract is completed.

____ 3. Beginning with the Tax Reform Act of 1986, the tax laws eliminated the use of the completed-contract method.

____ 4. The most popular input measure under percentage-of-completion accounting is the cost-to-cost method.

____ 5. Estimates of architects and engineers of percentage-of-completion are not acceptable under generally accepted accounting principles.

____ 6. At the conclusion of a construction contract, the balance in Construction in Progress will be exactly equal to the amount in Progress Billings on Construction Contracts when using the percentage-of-completion method.

____ 7. If analysis of construction contracts indicates that there will be an overall loss on the contract, the loss should immediately be recognized in full under the completed-contract method and the percentage-of-completion method.

____ 8. Under the cost recovery method, no income is recognized on a sale until the cost of the item sold is recovered through cash receipts with all subsequent receipts reported as revenues.

____ 9. The cost recovery method is the most conservative revenue recognition method.

____ 10. If a company is heavily involved in installment sales, the operating cycle of the business is normally defined as the average period of the installment contracts.

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True/False

Indicate whether the sentence or statement is true or false. 1 point for each question

____ 1. The completed-contract method was developed to relate recognition of revenue on long-term construction-type contracts to the activities of a firm in fulfilling these contracts.

____ 2. Estimates of architects and engineers of percentage-of-completion are not acceptable under generally accepted accounting principles.

____ 3. The use of the direct write-off method is acceptable under generally accepted accounting principles.

____4. The method of estimating uncollectible accounts expense based on the accounts receivable balance emphasizes the determination of the net realizable value of the receivables.

____5. The "list" sales price less any trade discount is the amount at which the receivable and the corresponding revenue should be recorded.

____6. In a bank reconciliation statement, an outstanding check must be subtracted from the bank statement balance in determining the correct cash balance.

____ 7. Accounting for installment sales using the deferred gross profit approach requires determining a gross profit rate for the sales of each year, and establishing an accounts receivable and a deferred revenue account identified by the year of the sale.

____ 8. The deferred gross profit accounts are reported as liabilities under the installment sale method.

____ 9. The cost recovery method is often used when the circumstances surrounding a sale are too uncertain to use the installment sale method.

____ 10. In a bank reconciliation statement, the amount of a not-sufficient-funds check must be added to the depositor's cash balance in determining the correct cash balance.

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ACC 100 Lecture Notes - Lecture 5: Gross Margin, Income Statement

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