SMG AC 222 Lecture Notes - Lecture 6: Cash Cash, Accounts Receivable, Income Statement

67 views6 pages

ivorycrab864

25 Aug 2016

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Chapter 6 Accounting for Sales

Recognition of Sales Revenue

Important to net income because:

— it directly increases net income by the amount of the revenue

— it recedes net income by triggering the recognition of certain expenses— for example,

companies report the cost of the items sold in the same period in which they recognize the

related revenue.

Profound effect on stock prices.

(1) A company must have delivered the goods or services to its customer, that is, it has earned

the revenue:

(2) it must have received cash or an asset virtually assured of being converted into cash, that is,

the revenue must be realized or realizable.

Revenue Recognition Process:

1) Identify the contract with a customer

2) Identify the separate performance obligations in the contract

3) Determine the transaction price

4) Allocate the transaction price to the separate performance obligations in the contract

5) Recognize revenue when (or as) the entity satisﬁes a performance obligation.

Company assigns a portion of the sales price to each product or service and records revenue

when the customer receives each product or service

1) entire product and/or service is not provided to the customer at the point of sale, revenue is

spread over the time periods in which the products and services are deilvered, and 2) there is

no realization criterion that is collectability of the sales price does not directly affect the

recording revenues.

2) there is no realization criterion, that is, collectability of the sales price does not directly affect

the recording revenues.

When delivery of a product r service is spread over time, both old and new standards require

delaying revenue recognition at least until the company delivers the product or service to the

customer.

Interpreting Financial Statements

percentage of completion method— method of recognizing revenue on long-term contracts as

production occurs, rather than waiting until the ﬁnal product is delivered. The company must

also recognize the associated expenses.

Liklihood of receiving payment…

find more resources at oneclass.com

Unlock document

This preview shows pages 1-2 of the document.
Unlock all 6 pages and 3 million more documents.

Already have an account? Log in

Completed contract method— method of recognizing revenue on long-term contracts that

delays recognition of both revenue and relate expenses until completion of the contract.

Measurement of Sales Revenue

When to recognize revenue, accountant must determine how to measure it

e.g. a cash sale is simplest — it increases Sales Revenue, an income statement account, and

increases cash, a balance sheet account, by the amount of cash received.

Accountant record a credit sale on open account much like cash sale, except it increases the

balance sheet account Account Receivable instead of Cash.

Receiving goods or services instead of cash for a sale… estimate the cash-equivalent

Gross Sales— the total amount of sales before deducting returns, allowances, and discounts.

net sales— the total amount of sales after deducting returns, allowances, and discounts.

sales returns (purchase returns) — merchandise returned by the customer.

sales allowance (purchase allowance)— reduction of the original selling price

Returns and allowances in a single account

Trade and Cash Discounts: reductions to the gross selling price for a particular class of

customers

cash discounts: reduction in the amount owed by customers due to prompt payment

credit terms:

n/30

1/5, n/30

15 E.O.M.

the net method assumes that the delayed receipt of cash is essentially a loan to the customer

cash discounts encourage prompt payment and reduce seller’s need for cash

reduces risk of bad debts*

decision depends on interest rates thought

find more resources at oneclass.com

Unlock document

This preview shows pages 1-2 of the document.
Unlock all 6 pages and 3 million more documents.

Already have an account? Log in

Document Summary

It directly increases net income by the amount of the revenue. It recedes net income by triggering the recognition of certain expenses for example, companies report the cost of the items sold in the same period in which they recognize the related revenue. Identify the separate performance obligations in the contract. 2: determine the transaction price, allocate the transaction price to the separate performance obligations in the contract, recognize revenue when (or as) the entity satis es a performance obligation. When delivery of a product r service is spread over time, both old and new standards require delaying revenue recognition at least until the company delivers the product or service to the customer. Interpreting financial statements percentage of completion method method of recognizing revenue on long-term contracts as production occurs, rather than waiting until the nal product is delivered. The company must also recognize the associated expenses.

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

Anderson Accounting Services LLC provides accounting and tax preparation and consulting services. Sometimes customers only wish to have financial statements and/or tax returns prepared. Sometimes customers bundle accounting and tax preparation with consulting services (to be provided over a period of time). Sometimes customers only wish to have consulting services provided over a period of time. Because Anderson is a service firm there is no cost of goods sold associated with their services.

Customer is Civic Corporation	1
Tax consulting begins on November 1st and runs through the next April	11/1/X7
Date of contract	11/1/X7
Length of consulting services	6 months	months
Tax return preparation occurs over the period February through April of	20X8
Length of tax prepartion	3 months
Price of tax preparation to be allocated over the return preparation period	$ 2,000	stand alone price
Price of consulting services to be allocated over consulting period	$ 5,000	stand alone price
Customers are charged a lesser amount as follows for both tax and consulting	$ 6,000
Anderson Accounting Services LLC's current year end	12/31/X7
Customers pay at the contract date for BOTH the consulting and tax preparation services.

What are the performance obligations in the contract?

Tax preparation services

Tax preparation services and tax consulting services

Unable to determine

D.Tax consulting services

QUESTION 3

Determine the transaction price that should be allocated to the consulting services.

	A.	$4,286
	B.	$1,714
	C.	$1,429
	D.	$4,571

QUESTION 4

Calculate the total revenue that should be recognized in the current accounting period.

	A.	$4,571
	B.	$1,714
	C.	$1,429
		D. $4,286

QUESTION 5

What is the total amount in the deferred revenue account(s) at the end of the current accounting period?

	A.	$1,714
	B.	$4,571
	C.	$4,286
	D.	$1,429

QUESTION 6

What is the total amount of revenue that should be recognized in the NEXT accounting period period?

	A.	$1,714
	B.	$4,286
	C.	$1,429
	D.	$4,571

QUESTION 7

The following journal entry has what impact on the income statement?

Debit Cash XXX

Credit Deferred Revenue XXX

	A.	No impact
	B.	Decrease
	C.	Increase

QUESTION 8

The following journal entry has what impact on the income statement?

Debit Cash XXX

Credit Accounts Receivable XXX

	A.	No impact
	B.	Increase
	C.	Decrease

QUESTION 9

Revenue is defined as:

An inflow or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entityâs ongoing major or central operations.

Revenue is recognized from the settlement of which of the following liabilities:

	A.	Discount on Bonds Payable
	B.	Deferred Revenue
	C.	Salaries Payable
	D.	Accrued Interest

QUESTION 10

A customer must have "control" over the good or service in order for a performance obligation to be considered as having been satisfied for purposes of revenue recognition.

	A.	TRUE
	B.	FALSE

DSY Cable Inc. (the âCompanyâ), a publicly traded company,manufactures and sells coaxial and fiber-optical cable. DSY iscontemplating two separate transactions for which it is evaluatingthe appropriate revenue recognition.
Transaction 1
Loon Inc., a customer of DSY, has entered into a binding writtenagreement to purchase
1,000 feet of 18 American wire gage (AWG) cable for $3 per foot.Because Loon is
constructing a new warehouse, it is unable to take delivery of thecable and has requested
in writing that DSY store the cable in its warehouse untilconstruction of Loonâs warehouse
is completed. Loonâs warehouse will be completed three months fromthe time of purchase,
at which time Loon is required to take delivery of the cable. DSYstores 18 AWG cable in
10,000-foot spools (spools of cable are considered finished goodsand ready for shipment).
DSY will not physically segregate the cable that Loon willpurchase; rather, the Company
will designate the quantity in its inventory tracking system asâsold,â thereby preventing
the use of the cable to fulfill other customer orders. In otherwords, DSY will âvirtuallyâ
segregate the inventory. DSY and its auditors have concluded thefollowing with respect to
the arrangement with Loon:
ï· Risks of ownership of the cable have passed to Loon.
ï· Loon has a substantial business purpose for requesting DSY tohold the cable at its
warehouse (waiting on completion of the warehouse).
ï· DSY does not have additional performance obligations with respectto the cable
purchased by Loon.
DSY concluded that it is appropriate to recognize revenue forTransaction 1 before the date
on which Loon takes delivery of the 1,000 feet of 18 AWG coaxialcable.
Transaction 2
Fiber Communication Inc., a customer of DSY, entered into a bindingwritten agreement to
purchase 1,500 feet of fiber-optical cable for $3 per foot. FiberCommunicationâs shipping
terms are freight on board (FOB) shipping point, and DSY collectedpayment before the
order shipped. Title transfers upon delivery to the carrier, andFiber Communication will
insure the product while it is in transit. Instead of using athird-party shipper (e.g., FedEx,
2
UPS), DSY elected to use its own logistics subsidiary, TransNetInc.* to deliver the cable to
Fiber Communication Inc.
Requirements
1. Is it appropriate for DSY to recognize revenue associated withTransaction 1 before
the date on which Loon takes delivery of the 1,000 feet of 18 AWGcoaxial cable?
Identify and research the existing guidance on revenue recognition(i.e., NOT FASB
ASC 606). Based on your research and interpretation of theguidance, develop two
or more alternative accounting treatments and discuss thealternative that you
believe is most appropriate.
2. Is it appropriate to recognize revenue upon transfer of theinventory to the carrier
in Transaction 2? Identify and research the existing guidance onrevenue
recognition. Based on your research and interpretation of theguidance, develop two
or more alternative accounting treatments and discuss thealternative that you
believe is most appropriate.
3. The new revenue recognition guidance, FASB ASC 606, Revenue FromContracts
With Customers, provides five steps to recognizing revenue; step 5requires an
entity to ârecognize revenue when (or as) the entity satisfies aperformance
obligation.â Describe in general the key principles of this step(and any applicable
implementation guidance) that would be relevant to determining howto recognize
revenue for the transactions described in this case. Please bespecific when
discussing the sections of FASB ASC 606 that are relevant to therevenue recognition
issues discussed in requirements 1 and 2. Also, be sure tocompletely discuss how
the revenue recognition for requirements 1 and 2 would be thesimilar or different
under FASB ASC 606 compared to the existing guidance on revenuerecognition.

SMG AC 222 Lecture Notes - Lecture 6: Cash Cash, Accounts Receivable, Income Statement

Document Summary

Get access

Related Documents

SMG AC 222 Study Guide - Midterm Guide: Accounts Payable, Deferral, Retained Earnings

SMG AC 222 Study Guide - Final Guide: Earnings Before Interest And Taxes, Deutsche Luft Hansa, Gross Margin

QST AC 221 Lecture Notes - Lecture 7: Time Deposit, Transaction Account, Accounts Receivable

Related Questions