Ch 9 - Revenue and Inventories Flashcards
Define revenue
Revenue is income arising in the course of an entity’s ordinary activities
Why is it important to get revenue recognition right?
Because it is a high risk area for manipulation in the accounts
What does revenue result from?
Sale of goods
Rendering of services
Receipt of interest, royalties and dividends
How should revenue be measured?
FV is amount for which an asset can be exchanged, or liability settled, between knowledgeable, willing parties in an arm’s length transaction.
It will take into account any trade discounts and volume rebates allowed by the seller
How is revenue dealt with in a cash sale?
revenue is the immediate proceeds of sale
How is revenue dealt with in a credit sale?
the revenue is the anticipated cash receivable
How is revenue dealt with if the time of money is material?
the revenue should be discounted to present value
Discount rate is 1/(1+r)^n
Where r is the rate of interest and n is the number of years
How do sales taxes and other similar items affect revenue recognition?
Revenue excludes sales taxes and similar items
These are not econ benefits for the entity
Example: Douglas Ltd sells gates for £5,000 on 1 Jan 201X on interest free credit for 3 years
A usual rate of borrowing is 6%
Douglas has a 31 Dec year end
How would this be dealt with over 3 years?
Year 1 [£5,000/(1.06)^3] = £4,198 Journal DR Debtors £4,198 CR Revenue £4,198 Since the amount to be received is actually £5,000, the debtor will gradually be increased in the accounts over the next 3 years. Known as unwinding the discount To complete the double entry, interest received it credited £4,198 x 6% = £252 Journal DR Debtors £252 CR Interest Received £252 So the closing DR is now (£4,198 + £252) = £4,450
Year 2
The debtor will again be unwound as (£4,450 x 6%)
Journal entry
DR Debtors £267
CR Interest received £267
Gives a close debtor of (£4,450 + £267) = £4,717
Year 3
The unwinding will be (£4,717 x 6%) = £283
Journal
DR Debtors £283
CR Interest Received £283
This will take the debtor up to (£4,717 + £283) = £5,000, ready for the £5,000 to be received from the customer
Define the ‘sale of a good’
Seller transfers risks and rewards of ownership to buyer
Seller doesn’t retain management or control over goods
Amount of revenue can be measured reliably
Econ benefits will probably flow to seller
Costs incurred can be measured reliably
How are revenue from services recognised from services?
Revenue from services is recognised according to the stage of completion
The following conditions must be met
The amount for revenue can be measured reliably
The transaction’s economic benefits will probably flow to the provider of the service
The stage of completion at the reporting date can be measured reliably
The costs incurred or to be incurred can be measured reliably
If these conditions are not met, then revenue should be restricted to any recoverable costs incurred
In FS prepared under CA2006, revenue is described as turnover, and you should use ‘turnover’ in the exam
What conditions must be met for revenue to be recognised from services?
The amount for revenue can be measured reliably
The transaction’s economic benefits will probably flow to the provider of the service
The stage of completion at the reporting date can be measured reliably
The costs incurred or to be incurred can be measured reliably
What must be done if the conditions for revenue measurement from services aren’t met?
then revenue should be restricted to any recoverable costs incurred
What term should be used for revenue in the exam?
In FS prepared under CA2006, revenue is described as turnover, and you should use ‘turnover’ in the exam
What conditions must be met before revenue can be recognised from the sale of goods?
The seller transfers the signify risks and rewards of ownership to the buyer
The seller doesn’t retain man or control over the goods sold
The amount of revenue can be reliably measured
The transaction’s economic benefits will probably flow to the seller
The costs incurred or to be incurred can be measured reliably
