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Canada (161,663)
RSM219H1 (136)
Chapter 4

MGT201 Ch4.docx

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Department
Rotman Commerce
Course
RSM219H1
Professor
Martin Ralph
Semester
Winter

Description
MGT201 Ch4 24/03/2013 8:14:00 AM Net sales = Gross sales - (Customer Discounts, Returns, Allowances) Gross profit = Net sales - Cost of goods sold Operating Profit = Gross Profit - Total operating expenses Net income (or Net profit) = Operating Profit – taxes – interest To measure the quality of the earnings: compare the cash flow from operations with the net earnings. If cash flow is less than NE then we consider the earnings to be of low quality. Cash-to-Cash Cycle · Operating Activities: all the normal, day-to-day activities of every business · Cash-to-Cash cycle is the outflow of cash that is followed by an inflow of cash Cash: Original investment by SHHs & loan -> Acquisition of inventory: Investing activities of acquiring property, plant and equipment, labours and inventory -> Selling Activity: pricing, advertising, hiring and managing, signing agreements..-> sales contracts between buyers and the sellers -> Delivery of Product: instantaneous, periodic, shipments -> Collection of the sales price: in cash or account receivable, interest charges, risk, price allowance (adjustment), cash discount according to the promptness of the payment -> Warranty Service: risk Budgeting & forecasting activity: Cash inflow> outflow, the company can expand its volume of activity Revenue Recognition: · Revenue is the inflow of cash or other benefits form the business’ s normal operating activities that don’t come from equity holders; only involved sales of goods and provisions of services · Expenses are the costs incurred to earn revenues. · N.E. = Revenues – Expenses · Matching- requires the simultaneous recognition of all costs that are or will be incurred to produce the revenue ; All costs incurred to produce the revenue must be recognized at the same time the revenue is recognized To reduce the uncertainty that is inherent in estimating future events, the company would need to recognize revenues later in the cash-to-cash cycle. When estimates are more reliable but the info would be less useful. -There is a conflict between measuring performance on a timely basis and the ability to measure performance reliably · Revenue recognition criteria within IFRS: 1) It is probable that economic benefits will flow to the company- when the activity that generated the revenue is completed; all the risks & rewards of the purchase have been transferred to the buyer 2) The requirement that the revenue can be reliably measured; the measurement is the agreed selling price. Assurance exists as to collectability . Companies that recognize credit sales are revenue must in the same period, recognize an expense that measures the probable uncollectibility of the accounts receivable. Various applications of revenue recognition: a. The Sale of Good a. A transfer of the risks and rewards to the buyer b. The company no longer has managerial involvement or control over the goods sold c. The revenue can be measured reliably d. economic benefits from the transaction will flow to the seller e. The costs incurred or to be incurred with respect to the transaction can be measured reliably. -FOB: Free on board, when the goods reach the buyers -it recognizes the warranty expense and a liability for these future costs. When actual costs are incurred, the liability is reduced. -Delivery: the revenue would not be recorded until the goods are delivered; deferred revenue, unearned revenue (L) etc. Then L can be debited and Sales Revenue be credited. i. Recognition at the time of contract signing: -Problems of collectability -Problems if matching the future development costs to the revenues -It is now only recognized at the time of contract signing if certain criteria are met: only min costs yet to be incurred, the receivables created are going to be collected ii. Recognition at the time of production *Mining & construction -no longer valid since market is unstable -Using ·forward contacts: an agreement between a buyer and a seller that establishes a fixed selling price · percentage of completion method recognizes a portion of a project’s revenues and expenses during the construction period based on the % of completion. The cost incurred relative to the estimated total costs Expenses this period / Total cost = % completed % completed * Total revenue = revenue to be recognized -Loss is required to be recorded ASAP so no additional profit or loss would be recorded at the end. iii. Recognition at the time of collection- When the collection of receivables is so uncertain b. Recognition for Delivery of Services a. The amount of revenue can be measured reliably b. It is probable that the benefits from the service will flow to the provider c. The stage of completion of the service is measured reliably d. The costs incurred with respect to the transaction can be measured reliably -Normally when the service is completed. Or the percentage of completion method c. Revenue from the Use by Others of a Company’s Assets a. The revenue is in the form of interest, dividends, or royalties b. Interest revenu
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