Chapter 5 Flashcards
Requires that the earnings process is judged to be complete or virtually complete, and there is reasonable certainty as to the collectibility of the asset to be received before revenue can be recognized
Realization Principle
Allocation of a share of a project’s revenues and expenses to each reporting period during the contract period
Percentage-of-Completion Method
Recognition of revenue for a long-term contract when the contract is complete
Complete Contract Method
Recognizes revenue and costs only when cash payments are received
Installment Sales Method
Deferral of all gross profit recognition until the cost of the item sold has been recovered
Cost Recovery Method
Customers’ right to return merchandise to retailers if they are not satisfied
Right of Return
The consignor physically transfers the goods to the other consignee but the consignor retains legal title
Consignment
Asset account equivalent to the asset work-in-progress inventory in a manufacturing company
Construction in Progress
Contra account to the asset construction in progress
Billings of Construction Contract
Ratio found by calculating the percentage of estimated total cost that has been incurred to date
Cost-to-Cost Ratio
Grants to the franchisee the right to sell the products and use the name of the franchise for a specific period of time
Franchisor
Individual or corporation given the right to sell the products and use the name of a franchise for a specific period of time
Franchisee
Measure of a company’s efficiency in using assets to generate revenue
Asset Turnover Ratio
Indicates how quickly a company is able to collect its accounts receivable
Receivables Turnover Ratio
Indication of the average age of accounts receivable
Average Collection Period
Measures a company’s efficiency in managing its investment in inventory
Inventory Turnover Ratio
Indicates the average number of days it normally takes to sell inventory
Average Days in Inventory
Net income divided by net sales; measures the amount of net income achieved per sales dollar
Profit Margin on Sales
Indicates a company’s overall profitability
Return on Asset (ROA)
Amount of profit management can generate from the assets that owners provide
Return on Equity (ROE)
Depict return on equity as determined by profit margin, asset turnover, and the equity multiplier
DuPont Framework
Promises to transfer goods and services to buyer
Performance Obligations
The cash flow precedes either expense or revenue recognition
Prepayments
Obligation by the seller to make repairs or replace products that are later demonstrated to be defective for some period of time after the sale
Quality Assurance Warranty
An additional, extended service that covers new problems arising after the buyer takes control of the product
Extended Warranties
Gives the holder the right either to buy or sell a financial instrument at a specified price
Option
The amount the seller expects to be entitled to receive from the buyer in exchange for providing goods and services
Transaction Price
Transaction price is uncertain because some of the price is to be paid to the seller depending on future events
Variable Consideration
Seller’s experience indicates that it will be entitled to receive an amount of uncertain consideration
Reasonably Assured to be Entitled
