Chapter 10 - Revenue and Inventory Flashcards
What are the five steps of revenue recognition?
- Identify contract
- Identify performance obligations
- Determine transaction price
- Allocate transaction price to performance obligations
- Recognise revenue when performance obligation is satisfied
Step 1: Identify contract
Define contract
Agreement between two parties that creates rights and obligations
Step 1: Identify contract
What are the criteria?
- Contract approved by parties
- Each party’s rights can be identified
- Contract has commercial substance (not masked as sale)
- Probably entity will get consideration
Step 2: Performance obligations
Define?
Good/Service with distinct function, can be sold separately
Step 2: Performance obligations
How to tell if Principal?
Provide good/service itself
Control good before transfer to buyer
Step 2: Performance obligations
How to tell if Agent?
Arrange for goods/services to be provided by another party
Step 2: Performance obligations
What does the agent recognise? £££
Commission
Step 2: Performance obligations
How to treat warranty with extra service?
separate performance obligation
Step 2: Performance obligations
How to treat warranty that provides assurance?
provision
Step 3: Determine transaction price
When should you include VARIABLE CONSIDERATION (bonus/penalty if company does …..) as part of transaction price?
Highly probable
Significant reversal of revenue won’t happen
Step 3: Determine transaction price
How to include financing in transaction price?
Present value
Do not need to do if one year or less
Step 3: Determine transaction price
How to include non-cash consideration?
fair value
Step 4: Allocate transaction price
What to do if no standalone selling price?
Estimate proportionately
Step 5: Recognize revenue
What is the criteria that a performance obligation satisfied OVER time?
One of:
- customer receives benefits
- creating/enhancing an asset for customer
- can demand payment to date
- we can’t use asset for alternative use
Step 5: Recognize revenue
What to do if can’t reliably measure outcome of contract?
Use recoverable costs from customer
Step 5: Recognize revenue
What is the criteria that a performance obligation satisfied AT A POINT IN TIME?
- customer has physical possession
- customer accepted asset
- customer has risks and rewards
- customer has legal title
- seller has right to payment
What is the accounting entry for a refund?
Selling price:
Dr Cash (full)
Cr Sale
Cr refund
Cost price:
Dr right to recover
Dr COS
Cr inventory (full)
What does inventory consist of?
Raw material
Work in progress
Finished goods
What is cost made up of?
Cost of purchase + Conversion costs
What is cost of purchase made up of?
Purchase price + directly attributable costs (import duties, delivery costs)
What are conversion costs made up of?
Direct costs- divide by actual
Variable - divide by actual
Fixed - divide by budget
What are the three methods of determining cost?
- Actual unit cost
- First in First out (FIFO)
- Weighted average cost
What is NRV?
Selling price - selling costs