6. Revenue And Inventories

Question 1

The 5 steps to recognize revenue

Answer 1

1. Identify contact
2. Identify performance obligations
3. Determine transaction price
4. Allocate transaction price to performance obligations
5. Recognize revenue when POs satisfied

Question 2

When can an entity only account for revenue?

Answer 2

1. Contract approved
   By both parties
2. Each party’s rights identified
3. Payment terms
4. Commercial substance
5. Probable consideration will be received

Question 3

Performance obligation definition

Answer 3

Promise
To transfer distinct goods/services
(That can be sold separately/has distinct function)

Question 4

What is the only way an agent can recognize revenue?

Answer 4

Can recognize commission only as revenue

Question 5

Treatment of warranties: 2 options

Answer 5

1. Providing extra service
2. Providing assurance item will work as intended

Question 6

Treatment of warranties: Providing extra service

Answer 6

Separate performance obligatoin

Question 7

Treatment of warranties: Providing assurance item will work as intended
E.g. guaranteeing repair

Answer 7

Recognised as provision

Question 8

Treatment if warranty purchased separately

Answer 8

Separate performance obligation

Question 9

Revenue: Variable consideration treatment

Answer 9

Estimate amount expected to be received

Only included if highly probable a significant reversal won’t occur

Question 10

Revenue: Financing: Treatment

Answer 10

Time value of money

Question 11

Revenue: Financing: Period less than one year

Answer 11

Don’t need to adjust for time value of money

Question 12

Revenue: What is non-cash consideration measured at?

Answer 12

Fair value
At date of transfer

Question 13

Revenue: What is non-cash consideration measured at if fair value cannot be determined?

Answer 13

Stand-alone selling price

Question 14

Revenue: When is revenue recognized?

Answer 14

When performance obligation satisfied

Question 15

Revenue: Satisfying revenue over time conditions

Answer 15

ONE of

1. Customer simultaneously receives and consumes benefits
2. Entity creating/enhancing asset controlled by customer
3. Entity cannot use asset for alternative use AND entity can demand payment for its performance to date

Question 16

Revenue recognition: What to do if the outcome of the contract cannot reliably be determined?

Answer 16

Recoverable costs incurred

Question 17

When is revenue recognized when satisfied in one point in time?

Answer 17

Usually when customer has control of asset
e.g. physical possession
accepted asset
significant risks and rewards
legal title
right to payment

Question 18

Revenue disclosure requirement: Contracts with customers

Answer 18

Disclosed separately

Question 19

How are inventories recognized?

Answer 19

LOWER of

1. Cost
2. Net realizable value

Question 20

Inventory: What is included in cost?

Answer 20

1. Purchase
2. Conversion (current location and condition)

Question 21

Inventory: What is included in cost of purchase?

Answer 21

1. Purchase price
2. Directly attributable costs
   E.g. import duties
   Delivery costs

Question 22

Inventory: What is included in conversion costs?

Answer 22

Directly related to producing inventory units
E.g. labor
Materials

Allocated overhead for conversion
(into finished goods)

Question 23

Inventory: How are variable production overheads valued?

Answer 23

Actual units of production

Question 24

Inventory: How are fixed production overheads valued?

Answer 24

Budgeted normal units of production

Question 25

Inventory: The 3 ways of determining cost

Answer 25

1. Actual unit cost
2. FIFO
3. AVCO

Question 26

Revenue: Net realizable value definition?

Answer 26

Actual/estimated
Selling price
LESS
All future costs to complete the sale
(Marketing, selling, distribution)

Question 27

Main inventory disclosire requirements?

Answer 27

1. Accounting policy adopted
   (Including cost formula used)
2. Total carrying amount
3. Amount of inventories:
   a. Carried at NRV
   b. Recogned as expense
4. Circumstances leading to write-down