Chapter 10 - Revenue and Inventory

Question 1

What are the five steps of revenue recognition?

Answer 1

1. Identify contract
2. Identify performance obligations
3. Determine transaction price
4. Allocate transaction price to performance obligations
5. Recognise revenue when performance obligation is satisfied

Question 2

Step 1: Identify contract

Define contract

Answer 2

Agreement between two parties that creates rights and obligations

Question 3

Step 1: Identify contract

What are the criteria?

Answer 3

• Contract approved by parties
• Each party’s rights can be identified
• Contract has commercial substance (not masked as sale)
• Probably entity will get consideration

Question 4

Step 2: Performance obligations

Define?

Answer 4

Good/Service with distinct function, can be sold separately

Question 5

Step 2: Performance obligations

How to tell if Principal?

Answer 5

Provide good/service itself

Control good before transfer to buyer

Question 6

Step 2: Performance obligations

How to tell if Agent?

Answer 6

Arrange for goods/services to be provided by another party

Question 7

Step 2: Performance obligations

What does the agent recognise? £££

Answer 7

Commission

Question 8

Step 2: Performance obligations

How to treat warranty with extra service?

Answer 8

separate performance obligation

Question 9

Step 2: Performance obligations

How to treat warranty that provides assurance?

Answer 9

provision

Question 10

Step 3: Determine transaction price

When should you include VARIABLE CONSIDERATION (bonus/penalty if company does …..) as part of transaction price?

Answer 10

Highly probable

Significant reversal of revenue won’t happen

Question 11

Step 3: Determine transaction price

How to include financing in transaction price?

Answer 11

Present value

Do not need to do if one year or less

Question 12

Step 3: Determine transaction price

How to include non-cash consideration?

Answer 12

fair value

Question 13

Step 4: Allocate transaction price

What to do if no standalone selling price?

Answer 13

Estimate proportionately

Question 14

Step 5: Recognize revenue

What is the criteria that a performance obligation satisfied OVER time?

Answer 14

One of:

• customer receives benefits
• creating/enhancing an asset for customer
• can demand payment to date
• we can’t use asset for alternative use

Question 15

Step 5: Recognize revenue

What to do if can’t reliably measure outcome of contract?

Answer 15

Use recoverable costs from customer

Question 16

Step 5: Recognize revenue

What is the criteria that a performance obligation satisfied AT A POINT IN TIME?

Answer 16

• customer has physical possession
• customer accepted asset
• customer has risks and rewards
• customer has legal title
• seller has right to payment

Question 17

What is the accounting entry for a refund?

Answer 17

Selling price:

Dr Cash (full)
Cr Sale
Cr refund

Cost price:
Dr right to recover
Dr COS
Cr inventory (full)

Question 18

What does inventory consist of?

Answer 18

Raw material

Work in progress

Finished goods

Question 19

What is cost made up of?

Answer 19

Cost of purchase + Conversion costs

Question 20

What is cost of purchase made up of?

Answer 20

Purchase price + directly attributable costs (import duties, delivery costs)

Question 21

What are conversion costs made up of?

Answer 21

Direct costs- divide by actual

Variable - divide by actual

Fixed - divide by budget

Question 22

What are the three methods of determining cost?

Answer 22

• Actual unit cost
• First in First out (FIFO)
• Weighted average cost

Question 23

What is NRV?

Answer 23

Selling price - selling costs