BUS 251 Chapter 4: Ch. 4 Notes

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Ch. 4 – Revenue Recognition and the Statement of Income
INTRODUCTION
- revenue = inflows of economic benefits from company’s ordinary operating activities
- there does not have to be a receipt of cash for company to recognize revenue
 so we use economic benefit
- quantity of revenue = amount & whether the trend shows increase/decrease over some accounting
periods
- quality of revenue = source(s) of revenue & company’s ability to sustain revenue over longer term
- users need to be aware of company’s revenue recognition policies so that they can make informed
judgments about reported revenues
REVENUE RECOGNITION
- general revenue recognition criteria state that revenue is earned when:
1) it is probable that economic benefits will flow to the company
2) amount of these benefits can be reliably measured
- specific revenue recognition criteria for sale of goods
1) significant risks & rewards of ownership of goods have been transferred to buyer
2) seller has no continuing involvement/control over goods
3) amount of revenue can be reliably measured
4) probably that economic benefits from transaction will flow to seller
5) costs incurred/will be incurred to complete transaction can be reliably measured
- specific revenue recognition criteria for provision of services
1) amount of revenue can be reliably measured
2) probably that economic benefits from transaction will flow to seller
3) costs incurred/will be incurred to complete transaction can be reliably measured
4) portion of total services completed can be reliably measured (if services ongoing)
- specific revenue recognition criteria for receipt of interest, royalties and dividends
1) amount of revenue can e reliably measured
2) probably that economic benefits from transaction will flow to company
MEASUREMENT
- revenue should be measured at fair value of the consideration received/receivable
 fair value = price of product/service that both buyer & seller agree to at time of transaction
 determined after any trade discount (negotiated/posted reduction to selling price) or
any quantity discount (discount offered when purchasing large quantities)
- bundling = sell products & services together for 1 price
 i.e. phones & plans
 seems like phone is received at no cost, but companies need to estimate fair value for each
component
- sales discount = provide customer w/ discount off purchase price if they pay w/in shorter period of
time
 i.e. 2/10, n/30 = 2% off if paid w/in 10 days otherwise net amount due in 30 days
 record sales discounts in contra revenue account (meaning it will normally have a debit
balance)
- sales returns use contra revenue account to record
 sales returns and allowances
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