6. Revenue And Inventories Flashcards
The 5 steps to recognize revenue
- Identify contact
- Identify performance obligations
- Determine transaction price
- Allocate transaction price to performance obligations
- Recognize revenue when POs satisfied
When can an entity only account for revenue?
- Contract approved
By both parties - Each party’s rights identified
- Payment terms
- Commercial substance
- Probable consideration will be received
Performance obligation definition
Promise
To transfer distinct goods/services
(That can be sold separately/has distinct function)
What is the only way an agent can recognize revenue?
Can recognize commission only as revenue
Treatment of warranties: 2 options
- Providing extra service
- Providing assurance item will work as intended
Treatment of warranties: Providing extra service
Separate performance obligatoin
Treatment of warranties: Providing assurance item will work as intended
E.g. guaranteeing repair
Recognised as provision
Treatment if warranty purchased separately
Separate performance obligation
Revenue: Variable consideration treatment
Estimate amount expected to be received
Only included if highly probable a significant reversal won’t occur
Revenue: Financing: Treatment
Time value of money
Revenue: Financing: Period less than one year
Don’t need to adjust for time value of money
Revenue: What is non-cash consideration measured at?
Fair value
At date of transfer
Revenue: What is non-cash consideration measured at if fair value cannot be determined?
Stand-alone selling price
Revenue: When is revenue recognized?
When performance obligation satisfied
Revenue: Satisfying revenue over time conditions
ONE of
- Customer simultaneously receives and consumes benefits
- Entity creating/enhancing asset controlled by customer
- Entity cannot use asset for alternative use AND entity can demand payment for its performance to date
Revenue recognition: What to do if the outcome of the contract cannot reliably be determined?
Recoverable costs incurred
When is revenue recognized when satisfied in one point in time?
Usually when customer has control of asset
e.g. physical possession
accepted asset
significant risks and rewards
legal title
right to payment
Revenue disclosure requirement: Contracts with customers
Disclosed separately
How are inventories recognized?
LOWER of
1. Cost
2. Net realizable value
Inventory: What is included in cost?
- Purchase
- Conversion (current location and condition)
Inventory: What is included in cost of purchase?
- Purchase price
- Directly attributable costs
E.g. import duties
Delivery costs
Inventory: What is included in conversion costs?
Directly related to producing inventory units
E.g. labor
Materials
Allocated overhead for conversion
(into finished goods)
Inventory: How are variable production overheads valued?
Actual units of production
Inventory: How are fixed production overheads valued?
Budgeted normal units of production
Inventory: The 3 ways of determining cost
- Actual unit cost
- FIFO
- AVCO
Revenue: Net realizable value definition?
Actual/estimated
Selling price
LESS
All future costs to complete the sale
(Marketing, selling, distribution)
Main inventory disclosire requirements?
- Accounting policy adopted
(Including cost formula used) - Total carrying amount
- Amount of inventories:
a. Carried at NRV
b. Recogned as expense - Circumstances leading to write-down
