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Financial Acct Systems 2 > Ch 18 > Flashcards

Ch 18 Flashcards

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
Q

Units In a multiple deliverable arrangement are considered separate units of accounting, provided that 3 things occur…

A

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

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25
Q

Multiple deliverable arrangements: basis for allocating separate units?

A

Relative fair value

26
Q

Relative fair value

A

What vendor could sell component for on standalone basis

27
Q

Accounting guidance: sales and discounts

A

Trade, volume and cash discounts reduce sales revenue

28
Q

Accounting guidance: sales with extended payment terms

A

Fair value measurement of revenue is determined by using
fair value of consideration received

or by discounting Future payments using imputed interest
Rate

29
Q

Accounting guidance: sales with right of return

A

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
Q

Accounting guidance: sales with buy back

A

Terms of buy back agreement must be analyzed to

determine if seller transferred risks and rewards of ownership

31
Q

Accounting guidance: bill and hold sales (recognition depends on 3 circumstances)

A

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
Q

Accounting guidance: sales involving principal-agent relationship (general)

A

Amounts collected by agent on behalf of principal aren’t
Revenue of agent

Revenue of agent is commission from sale

33
Q

Accounting guidance: sales involving principal-agent relationship (consignments)

A

Consignor recognizes revenues when goods are sold by
Consignee

Consignee recognizes revenue for commissions received

34
Q

Accounting guidance: trade loading and channel stuffing

A

Unless returns can be reliably measured, revenue shouldn’t

be recognized until goods are sold by distributor to 3rd parties

35
Q

Accounting guidance: multiple deliverable arrangements

A

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
Q

Revenue recognition before delivery: percentage of completion method

A

Companies recognize revenues and gross profit each

Period based on progress of construction (% completion)

37
Q

Completed contract method

A

Companies recognize revenues and gross profit only

When contract is completed at point of sale

38
Q

When should companies use the completed contract method (either of 3 conditions)

A

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
Q

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…

A

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
Q

Measuring progress toward completion: input measures

A

Costs incurred, labor hours worked

41
Q

Measuring progress toward completion: output measures (3)

A

1 Units of delivery measured as tons produced
2 floors of building completed
3 miles of highway completed

42
Q

Cost to Cost basis

A

Company measures percentage of completion

43
Q

Percent complete equation

A

Percent complete =

costs incurred to date/most recent estimate of total costs

44
Q

Revenue (or gross profit) to be recognized to date equation

A

Revenue (or gross profit) to be recognized to date =

% complete) x (estimated total revenue or gross profit

45
Q

Current period revenue (or gross profit) equation

A

Current period revenue (or gross profit) =
Revenue (or gross profit) to be recognized to date
- revenue (or gross profit) recognized in prior periods

46
Q

Percentage of completion: subtracting the balance In the Billings account from construction process…

A

Avoids double counting the inventory

47
Q

IFRS: competed contract method, percentage of completion method

A

IFRS doesn’t permit completed contract method

Companies must use percentage of completion method

48
Q

2 types of long term contract losses

A

1 loss in current period on profitable contract

2 loss on unprofitable contract

49
Q

loss in current period on profitable contract

A

Arise when during construction there’s a significant rise
In estimated total contract costs, but rise doesn’t eliminate
All profit

50
Q

Loss on unprofitable contract: accounting treatment

A

Company must recognize in period the entire expected

contract loss

51
Q

loss in current period on profitable contract, accounting treatment

A

Company records adjustment as loss in current period

52
Q

Completion of production basis

A

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
Q

Revenue recognition after delivery occurs when…

A

Collection of sales price is not reasonably assured

54
Q

3 methods of revenue recognition after delivery?

A

1 installment sales method

2 cost recovery method

3 deposit method

55
Q

Installment sales method

A

Recognizes income in periods of collection rather than in
Periods of sale

Company only defers the gross profit, not the actual sale

56
Q

Accounting for repossessions

A

Recognizes that company isn’t likely to collect related

Installment receivable and should write it off

57
Q

If installment sales are part of normal operations, companies may consider them as…

A

Current assets because they are collectible within the

Operating cycle of business

58
Q

If a company has deferred gross profit on installment sales, it generally treats it as…

A

Unearned revenue and classifies it as a current liability

59
Q

3 elements deferred gross profit consists of?

A

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
Q

Cost recovery method

A

Company recognizes no profit until cash payments by

Buyer exceed cost of merchandise sold

61
Q

Deposit method

A

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
Q

Under the deposit method what account is the liability listed as (2 possible)

A

1 refundable deposit

2 customer advance

Financial Acct Systems 2 (22 decks)

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