Chapter 2-Revenue Recognition and matching principles Flashcards
Revenue Recognition Principles
Signed Contract Risk and Rewards Transfer No price contingencies the product is delivered Services are used and rendered
Revenue from sales
Is recognized by Date of sale, delivery of goods or transfer of title. Use of assets as the time passes)Rent Royalty)
Revenue Recognition IFRS
Sale of Goods
Revenue and cost incurred can be measured reliably.
IT is propable the economic transaction will flow to the entity
The entity has transformed the buyers risk and rewards of ownership
Not retain managerial ownership to the extent goods or product sold
Construction contracts
transaction can be measured reliably
economic benefits to the transaction flow to the entity
Both the contract to complete the cost and the stage of completion at the end of completed period an be measured reliably.
Multiple elements arrangements
USGAAP- Doing lots of stuff for customer like building a hardware installing a phone system, giving training to their people, and breaking these jobs into small pieces and thereby recognizing revenue when it is due.
Special Accounting treatments
Deffered Credit/Deffered
liability
Expired cost
Are expense of income statement EX
Insurance Cost
Cost of Goods Sold
Period Costs
Unexpired Costs -
Stay on Balance sheet-Ex. Fixed Asset and Inventory
Unearned Royalties
paid in advance-Balance Sheet only
J.E
Cash
Unearned Royalty
Unearned Royalty
Earned Royalty
Classification of Intangible assets-Indefinability
Manner of Acquisition-Purchased Intangible assets
Internally developed tangible assets
Patents, copyrights ,franchise, trademarks, and goodwill are common intangible assets
purchased intangible asset are recorded at cost.
Internally developed intangible assets should be expensed again income becos us Gaap prohibits the capitalization of research and development costs.
Under IFRS intangible assets can be reported through cost or revaluation model
Under IFRS how is research costs treated
Internally developed intangible asset must be expensed
but asset arising from development is recognized if the entity can demonstrate the following:
Technological feasibility has been obtained
The entity intend to complete the intangible asset
The entity has the ability to use the intangible asset
The intangible asset will generate future economic benefits
Goodwill
Always Impairment Approach- No amortization
Revaluation Losses and gains treatment
Revaluation Losses- Income Statement
Revaluation Gains- OCI
Amortization of software cost
it is similar to percentage of completion formula is
Total capitalized amount*Current gross revenue for the period
——————————————————————————
Total cost projected for the rpoject
Impairment-Intangibles with a finite life
Use undiscounted future net cash flows
Amount of impairment (FV)-If not discounted cash flow
The things to which fair value option does not apply
pension plan, post retirement and post employment benefits, leases,financial instruments which are componenets of equity
Share based payments and stock options
Cause and effect-product cost
SG and A
expense it when you sell the product
period cost
immediate recog
Revenue is recognized when
A binding agreement exists
services rendered or delivery has occurred
fixed or determinable price exists
collection is reasonably assured
Cash to accrual conversion
The first thing to do is whether is the question is asking about revenue or expense:
If the question is asking about expense, we must determine accruals for the expense account not the cash account:
Whatever JE you determine for the account in question, the opposite entry is to an expense account (again, only if the question is asking about operating expenses)
Started year w/ $10,000 in prepaid expenses, & ended w/ $15,000 therefore it increased by $5,000. Prepaid expenses (asset) increase with a debit, therefore the JE for expense is a credit
DR Prepaid Expense 5,000
CR Expense 5,000
[If you want reasoning for above if prepaid asset increased, it means that cash basis expenses decreased by $5,000. We are taking the $5,000 we paid in cash (originally marked as expense), and instead accruing it using a prepaid expense account, to be expensed as it is used later]
Started the year w/ $5,000 accrued liabilities, and ended with $25,000 therefore it increased by $20,000. Accrued liabilities increase with a credit, therefore, the JE for expense is a debit
DR Expense 20,000
CR Accrued Liability 20,000
To find accrual expenses, use the expense JE’s to figure out answer:
Expense
150,000
5,000
20,000
165,000
The answer is $165,000
Q2)A company records items on the cash basis throughout the year and converts to an accrual basis for year-end reporting. Its cash-basis net income for the year is $70,000. The company has gathered the following comparative Balance Sheet information:
Beginning of year End of year
Accounts payable $ 3,000 $ 1,000
Unearned revenue 300 500
Wages payable 300 400
Prepaid rent 1,200 1,500
Accounts receivable 1,400 600
What amount should the company report as its accrual-based net income for the current year?
A. $68,800 B. $70,200 C. $71,200 D. $73,200
The question is asking about revenue, so must determine the accruals for the revenue account (not the cash account).
NOTE: Whatever JE you determine for the account in question, the opposite entry is to an revenue account (again, only if the question is asking about income/revenue)
A/P: Beginning $3,000 & ended with $1,000 A/P decreased by $2,000. Liabilities decrease with a debit, therefore the JE for revenue is a credit
U/R: Beginning $300 & ending $500 U/R increased by $200. Liabilities increase with a credit, therefore the JE for revenue is a debit
W/P: Beginning $300 & ending $400 W/P increased by $100. Liabilities increase with a credit, therefore the JE for revenue is a debit
P/R: Beginning $1,200 & ending $1,500 P/R increased by $300. Assets increase with a debit, therefore the JE for revenue is a credit
A/R: Beginning $1,400 & ending $600 A/R decreased by $800. Assets decrease with a credit, therefore the JE for revenue is a debit
To find accrual income, use the income JE’s to figure out answer:
Revenue
70,000
2,000
200
100
300
800
71,200
Therefore, the answer is $71,200
If converting cash to accrual basis
Prepaid expenses deduct from Operating expenses Increase in accrued liabilities add
Savor Co. had $100,000 in cash-basis pretax income for 20X2. At December 31, 20X2, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, 20X1, balances. Compared to the accrual basis method of accounting, Savor’s cash pretax income is:
D.
cash-basis income is $100,000. The journal entries for an increase and a decrease in accounts payable respectively are:
DR: Accounts receivable 10,000
CR: Sales 10,000
DR: Accounts payable 6,000
CR: Cash 6,000
The increase in accounts receivable should be added to the cash income as it was not considered and is recognized as earned for accrual income. The decrease in accounts payable was subtracted for cash-basis income. This is not a reduction in accrual income, and as a result, should be added back to the cash income. The computation is: 100,000+10,000+6,000 = 116,000, or a $16,000 increase from cash to accrual. In other words, the cash-basis income is $16,000 LOWER than accrual income.
