Financial Acct Systems 2 > Ch 18 > Flashcards

Ch 18 Flashcards

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0
Q

GAAP: revenue recognition principle: 2 times companies should recognize revenue

A

1 when realized or realizable

2 when earned

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1
Q

6 common sources of revenue

A 
1 sales
2 fees
3 rent
4 interest
5 royalties
6 service revenue
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2
Q

Revenues are realized when a company…

A

Exchanges goods and services for cash or claims to cash

receivables

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3
Q

Revenues are realizable when…

A

Assets a company receives are readily convertible to known

Amounts of cash or claims to cash

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4
Q

Revenues are earned when a…

A

Company has substantially accomplished what it must do

To be entitled to benefits represented by revenues

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5
Q

4 revenue transactions that allow companies to recognize revenue under the revenue recognition principle?

A

1 selling products at date delivered to customers
2 when services provided and billable
3 permitting others to use enterprise assets (interest, rent
Royalties)
4 disposing of assets other than products at date of sale

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6
Q

2 common reasons for departure of sale basis?

A

1 recognize earlier

2 delay recognition

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7
Q

Wen is earlier recognition appropriate?

A

If there’s high degree of certainty about amount of revenue

Earned

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8
Q

When is delayed recognition appropriate?

A

If degree of uncertainty concerning amount of either revenue
Or cost is very high

Or sale does not represent substantial completion of earnings
Process

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9
Q

2 types of sales transactions?

A

Selling products

Providing services

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10
Q

Revenue recognition: at point of sale

A

Companies commonly recognize revenues from manufacturing

And selling activities at point of sale (usually delivery)

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11
Q

The imputed interest rate is more clearly determinable by either of 2 ways?

A

1 prevailing rate for similar instrument of issuer with similar
Credit rating

2 rate of interest that discounts the nominal amount of the
Instrument to current sales price of goods or services

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12
Q

Sales with right of return: high rate of returns

A

High ratio of returned merchandise to sales

Postpone sales until return privilege has substantially expired

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13
Q

FASB: if company sells its products but gives buyer the right to return it, the company should recognize at time of sales transaction only if the following 6 conditions are met…

A

1 seller’s price fixed/determinable at date of sale
2 buyer has paid or is obligated to pay seller, obligation not
Contingent on resale of product
3 buyers obligation to seller doesn’t change if theft occurs
4 buyer acquiring product for resale has economic substance
Apart from what’s provided by seller
5 seller doesn’t have significant obligations to bring about
Resale
6 seller can reasonably estimate amount of future returns

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14
Q

Bill and hold sales

A

Result when buyer is not ready to take delivery but takes

Title and accepts billing

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15
Q

Principal-agent relationship

A

Amounts collected on behalf of principal are not revenue of
Agent

Revenue for the agent is the commission they receive
(Which is usually a percentage of total revenue)

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16
Q

Revenue recognition: Gross method

A

Record revenue for the full price of the ticket and then

Charging the cost of the ticket against the revenue

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17
Q

Revenue recognition: net approach

A

Revenue received is the commission for providing travel

Services, not the full fare price

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18
Q

Consignments

A 
The consignor (Manufactures or wholesalers) ships 
merchandise to consignee (dealer) who acts as agent for
The consignor in Selling the merchandise

Consignee charges a commission

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19
Q

Consignment: Account sales

A

Shows merchandise received, sold, expenses chargeable
To the consignment and the cash remitted

Report consignor periodically receives from the consignee

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20
Q

Trade loading

A

Crazy practice where manufacturers try to show sales,
Profits and market share they don’t actually have

Induce their wholesale customers (known as the trade)
To buy more product then they can promptly resell

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21
Q

Example of trade loading

A

Cigarette industry has exaggerated a couple years’ operating
Profits by as much as $600 million by taking profits from
Future years

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22
Q

Computer software industry: channel stuffing

A

Software maker offers deep discounts to its distributors to
Overbuy and record revenue when software left the loading
Dock

Done when software maker wants to make its financial
Results look good, reduces future earnings

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23
Q

Multiple deliverable arrangements (MDAs)

A

Provide multiple products or services to customers as

Part if single arrangement

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24
Units In a multiple deliverable arrangement are considered separate units of accounting, provided that 3 things occur...
1 delivered item has value to customer on standalone basis 2 arrangement includes general right of return relative to Delivered item 3 delivery or performance of undelivered item is considered Probable and substantially in control of seller
25
Multiple deliverable arrangements: basis for allocating separate units?
Relative fair value
26
Relative fair value
What vendor could sell component for on standalone basis
27
Accounting guidance: sales and discounts
Trade, volume and cash discounts reduce sales revenue
28
Accounting guidance: sales with extended payment terms
Fair value measurement of revenue is determined by using fair value of consideration received or by discounting Future payments using imputed interest Rate
29
Accounting guidance: sales with right of return
If there is uncertainty about possibility of return, recognize Revenue when goods are delivered and return period has Lapsed If company can reliably estimate future returns, recognize Revenue at point of sale
30
Accounting guidance: sales with buy back
Terms of buy back agreement must be analyzed to | determine if seller transferred risks and rewards of ownership
31
Accounting guidance: bill and hold sales (recognition depends on 3 circumstances)
1 recognize revenue when title passes to customer and Seller is only obligated to store item 2 customer makes fixed commitment to purchase goods, Requests that transaction be on bill and hold basis 3 goods must be segregated, complete and ready for Shipment
32
Accounting guidance: sales involving principal-agent relationship (general)
Amounts collected by agent on behalf of principal aren't Revenue of agent Revenue of agent is commission from sale
33
Accounting guidance: sales involving principal-agent relationship (consignments)
Consignor recognizes revenues when goods are sold by Consignee Consignee recognizes revenue for commissions received
34
Accounting guidance: trade loading and channel stuffing
Unless returns can be reliably measured, revenue shouldn't | be recognized until goods are sold by distributor to 3rd parties
35
Accounting guidance: multiple deliverable arrangements
Apply general revenue recognition principles to each element of arrangement that has stand alone value Once separate units of accounting are determined, amount Paid for arrangement is allocated among separate units Based on relative fair value
36
Revenue recognition before delivery: percentage of completion method
Companies recognize revenues and gross profit each | Period based on progress of construction (% completion)
37
Completed contract method
Companies recognize revenues and gross profit only | When contract is completed at point of sale
38
When should companies use the completed contract method (either of 3 conditions)
1 company has primarily short term contracts 2 company can't meet conditions for using percentage of Completion method 3 inherent hazards in contract beyond normal business risks
39
Companies must use the percentage of completion method when estimates of progress toward completions, revenues and costs are reasonably dependable and all of the following 3 conditions are met...
1 contract clearly specifies enforceable regarding goods or Services by parties of contract 2 buyer can be expected to satisfy all obligations under Contract 3 contractor can be expected to perform contractual obligations
40
Measuring progress toward completion: input measures
Costs incurred, labor hours worked
41
Measuring progress toward completion: output measures (3)
1 Units of delivery measured as tons produced 2 floors of building completed 3 miles of highway completed
42
Cost to Cost basis
Company measures percentage of completion
43
Percent complete equation
Percent complete = | costs incurred to date/most recent estimate of total costs
44
Revenue (or gross profit) to be recognized to date equation
Revenue (or gross profit) to be recognized to date = | % complete) x (estimated total revenue or gross profit
45
Current period revenue (or gross profit) equation
Current period revenue (or gross profit) = Revenue (or gross profit) to be recognized to date - revenue (or gross profit) recognized in prior periods
46
Percentage of completion: subtracting the balance In the Billings account from construction process...
Avoids double counting the inventory
47
IFRS: competed contract method, percentage of completion method
IFRS doesn't permit completed contract method Companies must use percentage of completion method
48
2 types of long term contract losses
1 loss in current period on profitable contract 2 loss on unprofitable contract
49
loss in current period on profitable contract
Arise when during construction there's a significant rise In estimated total contract costs, but rise doesn't eliminate All profit
50
Loss on unprofitable contract: accounting treatment
Company must recognize in period the entire expected | contract loss
51
loss in current period on profitable contract, accounting treatment
Company records adjustment as loss in current period
52
Completion of production basis
Companies recognize revenue when metals are mined or Crops harvested b/c the sales price is reasonably assured The units are interchangeable and no significant costs are involved in distributing the product
53
Revenue recognition after delivery occurs when...
Collection of sales price is not reasonably assured
54
3 methods of revenue recognition after delivery?
1 installment sales method 2 cost recovery method 3 deposit method
55
Installment sales method
Recognizes income in periods of collection rather than in Periods of sale Company only defers the gross profit, not the actual sale
56
Accounting for repossessions
Recognizes that company isn't likely to collect related | Installment receivable and should write it off
57
If installment sales are part of normal operations, companies may consider them as...
Current assets because they are collectible within the | Operating cycle of business
58
If a company has deferred gross profit on installment sales, it generally treats it as...
Unearned revenue and classifies it as a current liability
59
3 elements deferred gross profit consists of?
1 income tax liability to be paid when sales are reported As realized revenue 2 allowance for collection expense, bad debts, repossession Losses 3 net income (retained earnings restricted as dividend Availability)
60
Cost recovery method
Company recognizes no profit until cash payments by | Buyer exceed cost of merchandise sold
61
Deposit method
Seller reports cash received from buyer as deposit on the Contract and classifies it on balance sheet as liability Revenue not recognized til sale is complete
62
Under the deposit method what account is the liability listed as (2 possible)
1 refundable deposit 2 customer advance
Financial Acct Systems 2
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