ADM 2342 Chapter Notes - Chapter 8: Executory Contract, Accounts Payable, Net Income
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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. |
Answers to the 30multiple choice questions | 2 points each, 30questions, for 60 point total | ||||||||||
60 points | |||||||||||
< please record | 1) | From an internal control standpoint, the asset mostsusceptible to improper diversion and use is | |||||||||
answer here | a. | prepaid insurance. | |||||||||
b. | cash. | ||||||||||
c. | Equipment | ||||||||||
d. | Investments | ||||||||||
2) | Jolene is warehouse custodian and alsomaintains the accounting record of the inventory held at thewarehouse. An assessment of this situation indicates | ||||||||||
a. | documentation procedures are violated. | ||||||||||
b. | independent internal verification is violated. | ||||||||||
c. | segregation of duties is violated. | ||||||||||
< please record | d. | establishment of responsibility is violated. | |||||||||
answer here | |||||||||||
3) | Internal control is defined, in part, as a planthat safeguards | ||||||||||
a. | all balance sheet accounts. | ||||||||||
b. | assets. | ||||||||||
c. | liabilities. | ||||||||||
d. | capital stock. | ||||||||||
4) | The control principle related to nothaving the same person authorize and pay for goods is known as | ||||||||||
a. | establishment of responsibility. | ||||||||||
b. | independent internal verification. | ||||||||||
< please record | c. | segregation of duties. | |||||||||
answer here | d. | rotation of duties. | |||||||||
5) | Two individuals at a retail store work thesame cash register. You evaluate this situation as | ||||||||||
a. | a violation of establishment of responsibility. | ||||||||||
b. | a violation of segregation of duties. | ||||||||||
c. | supporting the establishment of responsibility. | ||||||||||
< please record | d. | supporting internal independent verification. | |||||||||
answer here | |||||||||||
6) | Having different individuals receive cash,record cash receipts, and hold the cash is an example of | ||||||||||
a. | establishment of responsibility. | ||||||||||
b. | segregation of duties. | ||||||||||
c. | documentation procedures. | ||||||||||
d. | independent internal verification. | ||||||||||
7) | An adjusting entry is not required for | ||||||||||
a. | outstanding checks. | ||||||||||
b. | collection of a note by the bank. | ||||||||||
c. | NSF checks. | ||||||||||
d. | bank service charges. | ||||||||||
8) | If a check correctly written and paid bythe bank for $591 is incorrectly recorded on the company's booksfor $519, | ||||||||||
the appropriate treatment on the bankreconciliation would be to | |||||||||||
a. | deduct $72 from the book's balance. | ||||||||||
b. | add $72 to the book's balance. | ||||||||||
c. | deduct $72 from the bank's balance. | ||||||||||
d. | deduct $591 from the book's balance. | ||||||||||
9) | During 2013, Parker Enterprises generatedrevenues of $60,000. The company's expenses were as follows: | ||||||||||
cost of goods sold of $30,000, operatingexpenses of $12,000 and a loss on the sale of equipment of$2,000. | |||||||||||
Parker's gross profit is: | |||||||||||
a. | $16,000.00 | ||||||||||
b. | $18,000.00 | ||||||||||
c. | $30,000.00 | ||||||||||
d. | $60,000.00 | ||||||||||
10) | A primary difference between a periodicand perpetual inventory system is that a periodic system: | ||||||||||
a. | determines the inventory on hand only at the end ofthe accounting period. | ||||||||||
b. | provides better control over inventories. | ||||||||||
c. | records the cost of goods sold after each saletransaction. | ||||||||||
d. | keeps a record showing the merchandise inventory onhand at all times. | ||||||||||
11) | A decline in a company's gross profitcould be caused by all of the following except: | ||||||||||
a. | selling products using a lower markup. | ||||||||||
b. | clearance of discontinued inventory. | ||||||||||
c. | paying lower prices to its suppliers. | ||||||||||
d. | increasing competition resulting in a lower sellingprice. | ||||||||||
12) | South Company uses the perpetual inventorysystem. South's goods in transit at December 31 include: | ||||||||||
Sales made by South | Purchases made by South | ||||||||||
(1) FOB destination | (3) FOB destination | ||||||||||
(2) FOB shipping point | (4) FOB shipping point | ||||||||||
Which itemsshould be included in South's inventory at December 31? | |||||||||||
a. (2) and (3) | |||||||||||
b. (1) and (4) | |||||||||||
c. (1) and (3) | |||||||||||
d. (2) and (4) | |||||||||||
13) | In periods of rising prices, the inventorymethod which results in the greatest net income is the: | ||||||||||
a. | LIFO method. | ||||||||||
b. | FIFO method. | ||||||||||
c. | Weighted Average method. | ||||||||||
d. | Lower of Cost or Market method. | ||||||||||
14) | The following information was available for RawleyCompany at December 31, 2008: | ||||||||||
inventory (Jan .01) $80,000; inventory (Dec. 31)$120,000; cost of goods sold $600,000; | |||||||||||
accounts receivable $73,000; and sales$900,000. | |||||||||||
Rawley's inventory turnover in 2008 was: | |||||||||||
a. | 9.00 times. | ||||||||||
b. | 7.50 times. | ||||||||||
c. | 6.00 times. | ||||||||||
d. | 5.00 times. | ||||||||||
15) | A petty cash fund of $200 is replenishedwhen the fund contains $5 in cash and receipts for $193. | ||||||||||
The entry to replenish the fund would: | |||||||||||
a. | credit Cash Over and Short for $2. | ||||||||||
b. | credit Miscellaneous Revenue for $2. | ||||||||||
c. | debit Cash Over and Short for $2. | ||||||||||
d. | debit Miscellaneous Expense for $2. | ||||||||||
16) | An item is considered material if | ||||||||||
a. | it doesn't costs a lot of money. | ||||||||||
b. | it is of a tangible good intended for re-sale. | ||||||||||
c. | it is likely to influence the decision of aninvestor or creditor. | ||||||||||
d. | the cost of reporting the item is greater than itsbenefits. | ||||||||||
17) | Receivables might be sold to | ||||||||||
a. lengthen the cash-to-cash operating cycle. | |||||||||||
b take advantage of deep discounts on the cashrealizable value of receivables. | |||||||||||
c. generate cash quickly. | |||||||||||
d. finance companies at an amount greater than cashrealizable value. | |||||||||||
18) | If the amount of uncollectible accountexpense is understated at year end: | ||||||||||
a. | net income will be understated. | ||||||||||
b. | stockholders' equity will be understated. | ||||||||||
c. | allowance for doubtful accounts will be overstated. | ||||||||||
d. | net accounts receivable will be overstated. | ||||||||||
19) | A debit balance in the Allowance for DoubtfulAccounts | ||||||||||
a. | is the normal balance for that account. | ||||||||||
b. | indicates that actual bad debt write-offs haveexceeded previous provisions for bad debts. | ||||||||||
c. | indicates that actual bad debt write-offs have beenless than what was estimated. | ||||||||||
d. | cannot occur if the percentage of sales method ofestimating bad debts is used. | ||||||||||
20) | Bad Debts Expense is considered | ||||||||||
a. | an avoidable cost in doing business on a credit basis. | ||||||||||
b. | an internal control weakness. | ||||||||||
c. | a necessary risk of doing business on a credit basis. | ||||||||||
d. | avoidable unless there is a recession. | ||||||||||
21) | The best managed companies will have | ||||||||||
a. | no uncollectible accounts. | ||||||||||
b. | a very strict credit policy. | ||||||||||
c. | a very lenient credit policy. | ||||||||||
d. | some accounts that will prove to be uncollectible. | ||||||||||
22) | Two methods of accounting for uncollectibleaccounts are the | ||||||||||
a. | allowance method and the accrual method. | ||||||||||
b. | allowance method and the net realizable method. | ||||||||||
c. | direct write-off method and the accrual method. | ||||||||||
d. | direct write-off method and the allowance method. | ||||||||||
23) | When the allowance method of accountingfor uncollectible accounts is used, Bad Debts Expense isrecorded | ||||||||||
a. | in the year after the credit sale is made. | ||||||||||
b. | in the same year as the credit sale. | ||||||||||
c. | as each credit sale is made. | ||||||||||
d. | when an account is written off as uncollectible. | ||||||||||
24) | Allowance for Doubtful Accounts on the balancesheet | ||||||||||
a. | is offset against total current assets. | ||||||||||
b. | increases the cash realizable value of accountsreceivable. | ||||||||||
c. | appears under the heading "Other Assets." | ||||||||||
d. | is offset against accounts receivable. | ||||||||||
25) | In reviewing the accounts receivable, thecash realizable value is $14,000 before the write-off of a $1,500account. | ||||||||||
What is the cash realizable value after thewrite-off? | |||||||||||
a. | $1,500 | ||||||||||
b. | $12,500 | ||||||||||
c. | $14,000 | ||||||||||
d. | $15,500 | ||||||||||
26) | The maturity value of a $60,000, 10%, 60-day notereceivable dated July 3 is | ||||||||||
a. | $60,000 | ||||||||||
b. | $61,000 | ||||||||||
c. | $66,000 | ||||||||||
d. | $70,000 | ||||||||||
27) | The interest on a $10,000, 10%, 1-year notereceivable is | ||||||||||
a. | $1,000 | ||||||||||
b. | $10,000 | ||||||||||
c. | $10,100 | ||||||||||
d. | $11,000 | ||||||||||
28) | The maturity value of a $60,000, 8%, 3-month notereceivable is | ||||||||||
a. | $60,400 | ||||||||||
b. | $60,480 | ||||||||||
c. | $61,200 | ||||||||||
d. | $64,800 | ||||||||||
29) | Notes receivable are recorded in the accounts at | ||||||||||
a. | cash (net) realizable value. | ||||||||||
b. | face value. | ||||||||||
c. | gross realizable value. | ||||||||||
d. | maturity value. | ||||||||||
30) | Which of the following are also called tradereceivables? | ||||||||||
a. | Accounts receivable | ||||||||||
b. | Other receivables | ||||||||||
c. | Advances to employees | ||||||||||
d. | Income taxes refundable | ||||||||||