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ACC 100 Chapter 5: Chapter 5 Notes and Definitions

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olivetrout85
10 Mar 2017
School
Ryerson University
Department
Accounting
Course
ACC 100
Professor
Donna Bell

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Document Summary

Cash purchases are recorded by an increase in merchandise inventory and a decrease in cash. Goods that are damaged, defective, or of inferior quality may be returned to the seller for credit if the sale was made on credit, or for a cash refund if the purchase was for cash. The transaction described is a purchase return and is recorded by decreasing accounts payable and decreasing merchandise. Be sure to be able to produce the multiple step income statement! Single-step income statement an income statement in which all expenses are added together and subtracted rom all revenues. Multiple-step income statement an income statement that shows classifications of revenue and expenses as well as important subtotals. How to create a multiple-step income: cost of goods sold is deducted from net sales to arrive at gross profit. Income from operations is found by subtracting total operating expenses from gross profit.

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Related Questions

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.

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.

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 company’s 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.