B describe general principles of revenue recognition and accrual accounting, specific revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, gross and net reporting of revenue), and implications of revenue recognition principles for fi Flashcards
Describe general principles of revenue recognition and accrual accounting, specific revenue recognition application (including accounting for long-term contracts, installment sales, barter transactions, gross and net reporting of revenue), and implications of revenue recognition principles for financial analysis
General principles of revenue recognition
Revenue costs incurred and completion costs can reliably measure a probable flow of economic benefits
Revenue Recognition for goods
Transfer ownership (risks and reward) There is no continuing control or management over the goods sold
Revenue Recognition for Services
The stage of completion can be measured
Accrual accounting general principles
Revenues are recognized when earned
Expenses are recognized when incurred
Unearned revenue ($ received before good or service) like a subscription
+Liability (unearned revenue), +Cash
Recognition: +Revenue, -Unearned Revenue
‘Recognition’
Rev or Exp making it onto IS
FASB Rev. Recognition Principles
Realized or realizable
Earned
SEC rev. rec principle additional guidelines
Contracts
Delivered, Rendered
Priced
Seller is sure of collecting $$
Specific Revenue Recognition Applications
aka (recognizing revenue before delivery or after delivery)
Long term contracts (service or licensing ) > 1 acct period [construction]
Installment Sales (Financing a sale) > 1 acct period
: Firm finances a sale - expect to receive payments over an extended period - certain collection = recognize at time of sale, uncertain - use INSTALLMENT METHOD (where we get multiple payments): Recognize Prof proportionately as we get money or wait till we recover costs then rec. profits. Really uncertain, use cost recovery method
Barter Transactions (no cash payments)
Long-term contracts
‘long-term’>1 accounting period
Recognition: % of completion and completed contract methods
(reliable estimate) % of completion: Recognize Rev,Exp,Prof AS work is performed: (costs/Total cost)=%(Contract)=revenue to date. Exp = costs
(Unreliable estimate) Contract method: Rev, Exp, Prof recognized at values @ end of contract
% of completion method v. completed contract method
Aggression: Revenue is reported soon: % of completion
Subjective: Involves cost estimates: % of completion
Smoother earnings: %completion
Better matches Rev. n Exp over time: %completion
CF’s: Same, %compl CF’s=completed contract CF’s
Installment Sales rev recognition
Collectibility: Certain (Normal rev. rec. criteria aka rev. rec. at time of sale). Uncertain (Installment method). Highly uncertain (cost recovery method)
Installment sales collectibility = uncertain [use: sales of real estate, other firm assets]
Installment method: Profit is recognized as cash is collected. Cash collected = collections
collections = Cash +, AR -
Profit = Cash collected during the period x total expected profit as a percentage of sales.
‘Total expected profit as a % of sales’ = Contract - Original Cost / Contract = %
$$Collection (%) = Profit
Cost Recovery Method collectibility = highly uncertain
Profit recognition, where Cash Collected > Costs Incurred
Collections recieved = original cost
Collections > costs incurred = profit
Barter Transaction (no cash exchanged)
Round trip-barter: Sale of goods to one party with simultaneous purchase of almost identical goods from the same party [Internet companies buying and selling advertising space]
Recognition according to GAAP: Recognize at historical fair value if any. No $$$? Record at the CV of the asset surrendered.
IFRS: Fair value from similar non-barter transactions with unrelated parties.
