2. Financial Statements and Revenue Recognition Flashcards
What are the two components of the core revenue recognition principle?
- Revenue should be recognized upon transfer of promised goods and services to customers.
- The amount of revenue recognized represents the consideration the entity expects to receive in exchange for the goods and services.
When a bank account is overdrawn, can the negative balance be netted with positive balances in other accounts to determine total cash and equivalents?
Overdrawn accounts can be netted with positive accounts only if they are at the same institution and have the right of offset. Otherwise, the negative balance is recognized as a liability.
Does a dividend decrease equity when it is declared or when it is paid?
A dividend decreases equity when it is declared.
If the expected cost of satisfying a performance obligation exceeds the revenue an entity expects to earn from the performance obligation, when should the entity recognize the loss?
The entity should recognize the loss in the earliest period in which it determines that it will incur the loss, even if it hasn’t yet satisfied the performance obligation.
Under IFRS, when may financial liabilities be measured at fair value?
When doing so will result in more relevant information. Otherwise, financial liabilities are measured at amortized cost.
Under IFRS, when is a financial instrument accounted for at amortized cost?
When the entity holds the financial instrument to collect its scheduled principal and interest payments (e.g. a bond). All other financial instruments are accounted for at fair value under IFRS.
What are the criteria for a security to be qualified as a cash equivalent under US GAAP?
- highly liquid
- matures within 90 days from date of purchase (not date of issuance)
How is the purchase of treasury stock recorded under US GAAP?
Under US GAAP, the purchase of treasury stock is recorded as a reduction of stockholder’s equity on the balance sheet.
What criteria constitute a “distinct performance obligation” under the second step in revenue recognition per ASC 606?
- The good or service must benefit the customer when used by itself or with other resources available to the customer
- The promise to transfer the good or service is identified separately from other promises in the contract
Where does a parent company report a noncontrolling interest in a subsidiary on its financial statements?
A noncontrolling interest in a subsidiary is reported in the stockholders’ equity section of the balance sheet.
E.g. if Shitco owns 80% of Poopinc, Shitco reports the 20% noncontrolling interest in stockholders’ equity on its balance sheet
When does an Onerous Performance Obligation occur, and when should a company recognize a loss from it?
An Onerous Performance Obligation occurs when satisfying a performance obligation will cost more than the revenue allocated to that performance obligation. A company should recognize a loss from an onerous performance obligation in the earliest period in which it determines it will incur a loss.
