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Intermediate Accounting I :!: > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

Revenue recognition was previously based on the:

A

“realization principle”

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2
Q

What is the core revenue recognition principle?

A

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.

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3
Q

What are the five steps used to apply the Core Revenue Recognition Principle?

A
  1. Identify the contract with customer
  2. Identify the performance obligation(s) in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to each performance obligation.
  5. Recognize revenue when (or as) each performance obligation is satisfied.
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4
Q

What are performance obligations?

A

are promises to transfer goods or services to a customer.

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5
Q

When are performance obligations satisfied?

A

They are satisfied when the seller transfers control of goods or services to the customer.

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6
Q

What are the indicators that control has been transferred from the seller to the customer?

A
  1. An obligation to pay the seller
  2. Legal title to the asset
  3. Physical possession of the asset
  4. Assumed the risks and rewards of ownership
  5. Accepted the asset
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7
Q

What are the criteria for recognizing revenue over time?

A
  1. The customer consumes the benefit of the seller’s work as it is performed (i.e. a company provides cleaning services to a customer for a period of time)
  2. The customer controls the asset as it is created (i.e. when a contractor builds an extension onto a customer’s existing building)
  3. The seller is creating an asset that has no alternative use to the seller, and the seller has the legal right to receive payment for progress to date (i.e. as when a company manufactures customized fighter jets for the U.S. Air Force)
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8
Q

How is revenue recognized when a performance obligation is satisfied over time?

A

Revenue is recognized in proportion to the amount of the performance obligation that has been satisfied

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9
Q

Most __________ qualify for revenue recognition over time.

A

long-term contracts

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10
Q

__________ can be used to estimate progress towards completion when performance obligations are satisfied over time.

A

Input or output methods

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11
Q

Promises to provide goods and services are performance obligations when the goods and services are __________.

A

distinct

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12
Q

A good or service is distinct if it is both:

A
  1. Capable of being distinct. (i.e. The customer could use the good or service on its own or in combination with other good and services it could obtain elsewhere)
  2. Separately identifiable from other goods or services in the contract. (i.e. The good or service is distinct in the context of the contract because it is not highly interrelated with other goods and services in the contract)
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13
Q

What is the transaction price?

A

is the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and services

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14
Q

If a contract includes more than one performance obligation, the seller allocates the transaction price to each one in proportion to _____________.

A

their stand-alone selling prices

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15
Q

What is a stand-alone selling price?

A

is the amount at which the good or service is sold separately under similar circumstances.

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16
Q

Revenue with respect to each performance obligation is recognized when (or as):

A

that performance obligation is satisfied.

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17
Q

What is a contract?

A

an agreement that creates legally enforceable rights and obligations.

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18
Q

A seller must believe __________ is probable for a contract to exist for the purposes of revenue recognition.

A

collectibility

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19
Q

A contract does not exist if:

A
  1. neither the seller nor the customer has performed any obligations under the contract
  2. both the seller and the customer can terminate the contract without penalty.
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20
Q

A(n) __________ is not a performance obligation.

A

prepayment

(Why?) because they aren’t a promise to transfer a product or service to a customer.

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21
Q

A(n) __________ warranty is not a performance obligation.

A

quality-assurance

(Why?) Rather, it is a cost of satisfying the performance obligation to deliver products of acceptable quality.

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22
Q

What is a quality-assurance warranty?

A

warranty that obligates the seller to make repairs or replace products that later are found to be defective or unsatisfactory.

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23
Q

A(n) __________ warranty is a separate performance obligation.

A

extended

(Why?) Because an extended warranty is priced and sold separately from the product, it constitutes a performance obligation and can be viewed as a separate sales transaction.

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24
Q

What is an extended warranty?

A

offered as an additional service that covers new problems arising after the customer takes control of the product.

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25
Q

An option for additional goods or services is a performance obligation if it confers a ________ ________ to the customer would not receive otherwise.

A

material right

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26
Q

What are the specific situations that affect the transaction price?

A
  1. Variable consideration
  2. Sales with a right of return
  3. Identifying whether the seller is acting as a principal or an agent
  4. Time value of money
  5. Payments by the seller to the customer
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27
Q

What is variable consideration?

A

Is estimated as either the expected value or the most likely amount.

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28
Q

If there are several outcomes, the ________________ will be more appropriate. On the other hand, if only two outcomes are possible, the ________________ will be more appropriate.

A

expected value

most likely amount

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29
Q

Sellers are limited to recognizing variable consideration to the extent that it is probable that a significant __________ will not occur in the future.

A

revenue reversal

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30
Q

What are the indicators that a significant revenue reversal could occur?

A
  1. poor evidence on which to base an estimate
  2. dependence of the estimate on factors outside the seller’s control
  3. a history of the seller changing payment terms on similar contracts
  4. a broad range of outcomes that could occur
  5. a long delay before uncertainty resolves
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31
Q

Is a “right of return” considered a performance obligation?

A

No

(Why?) Instead, it represents a potential failure to satisfy the original performance obligation to provide goods that the customer wants to keep.

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32
Q

How do we calculate Net sales?

A

Sales revenue
Less: Sales returns
Net sales

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33
Q

What is a principal?

A

controls goods and services and is responsible for providing them to the customer.

34
Q

What is an agent?

A

doesn’t control goods or services, but rather facilitates transfers between sellers and customers.

35
Q

An agent only records its __________ as revenue.

A

commission

36
Q

Sellers must account for the __________ component of transactions when it is significant.

A

financing

37
Q

Identify the approaches used to estimate stand-alone selling prices:

A
  1. Adjusted market assessment approach
  2. Expected cost plus margin approach
  3. Residual approach
38
Q

What is the adjusted market assessment approach?

A

The seller considers what it could sell the product or services for in the market in which it normally conducts business, perhaps referencing prices charged by competitors.

39
Q

What is the expected cost plus margin approach?

A

The seller estimates its cost of satisfying a performance obligation and then adds an appropriate profit margin.

40
Q

What is the residual approach?

A

used to estimate a stand-alone selling price that is very uncertain

41
Q

__________ allow the customer to use the seller’s intellectual property.

A

Licenses

42
Q

If a seller’s activities during the license period are not expected to affect the intellectual property being licensed to the customer, then:

A

the revenue is recognized at the START of the license period.

43
Q

If a seller’s activities during the license period are expected to affect the intellectual property being licensed to the customer, then:

A

the revenue is recognized OVER the license period

44
Q

What is a franchise arrangement?

A

a franchisor (e.g. Subway) grants to the franchisee the right to sell the franchisor’s products and use its name.

45
Q

What is a bill-and-hold arrangement?

A

exists when a customer purchases goods but requests that the seller not ship the product until a later date.

46
Q

Revenue recognition occurs at __________ for a bill-and-hold arrangement.

A

delivery

47
Q

What is a consignment arrangement?

A

Where a company arranges for another company to sell its product under consignment. The “consignor” physically transfers the goods to the other company (the consignee), but the consignor retains legal title. If a buyer is found, the consignee remits the selling price to the consignor. If the consignee can’t find a buyer within an agreed-upon time, the consignee returns the goods to the consignor.

48
Q

Revenue recognition occurs upon __________ in a consignment arrangement.

A

sale to an end customer

49
Q

Sales of gift cards are recognized as __________.

A

deferred revenue

50
Q

The seller recognizes __________, __________, and __________ on separate lines of its balance sheet.

A 
contract liabilities (deferred revenue)
contract assets (before the customer has paid for it)
accounts receivable (before the customer has paid for it)
51
Q

Companies provide detailed __________ about revenues.

A

disclosures

52
Q

What is the percentage-of-completion method?

A

recognized revenue in each year of the contract (long-term) according to the progress toward completion that occurred during that year.

53
Q

Long-term contracts that didn’t qualify for revenue recognition over time were accounted for using an approach called the __________.

A

completed contract method

(Why?) Because all revenue was recognized at a single point in time - upon completion of the contract.

54
Q

Construction in progress (CIP) is the contractor’s __________ inventory.

A

work-in-process

55
Q

Accounting for costs, billings, and cash receipts does not depend on the __________ of revenue recognition.

A

timing

56
Q

The billings on construction account is a __________ to the CIP asset.

A

contra account

57
Q

The billings on construction contract account prevents __________ assets by reducing CIP whenever an account receivable is recognized.

A

“double counting” (having both the physical asset and the financial asset in the balance sheet at the same time constitutes double counting the same arrangement.)

58
Q

The same total amount of revenue is recognized whether it’s over the term of the contract or only upon completion, but the __________ of recognition differs.

A

timing

59
Q

CIP includes __________ and __________ on the contract that have been recognized to date.

A

profits

losses

60
Q

If a contract doesn’t qualify for revenue recognition over time, revenue is recognized when __________.

A

the project is completed

61
Q

If revenue is recognized upon completion of the contract, CIP is updated to include __________ at that point in time.

A

gross profit

62
Q

If a contract qualifies for revenue recognition over time, revenue is __________ as the project is completed.

A

recognized over time

63
Q

How do we calculate Revenue recognized this period?

A

Revenue recognized this period = (Total estimated revenue * Percentage completed to date) - Revenue recognized in prior periods

64
Q

How should progress to date be estimated?

A
  1. Use output-based measures (i.e. number of units produced or delivered, achievement of milestones, and surveys or appraisals of performance completed to date)
  2. Use seller’s input, measured as the proportion of effort expended thus far relative to the total effort expected to satisfy the performance obligation (i.e. costs incurred, labor hours expended, machine hours used, time lapsed)
65
Q

When recognizing revenue over the term of the contract, CIP is updated each period to include _________.

A

gross profit

66
Q

The income statement includes:

A
  1. revenue
  2. cost of construction
  3. gross profit
67
Q

What is the journal entry to close billing and CIP accounts upon contract completion whether revenue is recognized over time or upon completion?

A

Debit: Billings on construction contract
Credit: Construction in progress (CIP)

68
Q

__________ of revenue recognition does not affect the total amount of profit or loss recognized.

A

Timing

69
Q

__________ contracts are subtracted from CIP to determine the balance sheet presentation.

A

Billings on construction

70
Q

CIP in excess of billings is treated as a __________ rather than an accounts receivable, whereas billings in excess of CIP is treated as a __________.

A

contract asset

contract liability

71
Q

Recognized losses on long-term contracts reduce the __________ account.

A

CIP

72
Q

An estimated loss on a long-term contract is fully recognized in the ____________, regardless of whether revenue is recognized over time or upon completion.

A

first period the loss is anticipated

73
Q

Revenue recognition criteria help ensure that an income statement reflects:

A

the actual accomplishments of a company for the period.

74
Q

Identify the methods of revenue recognition:

A
  1. percentage-of-completion
  2. completed contract
  3. cost recovery
  4. installment sales
75
Q

A company is considered an __________ if it has discretion in setting prices and identifying suppliers.

a) principal
b) agent

A

a) principal

76
Q

Identify the distinction between a principal and an agent:

A

If a company is a PRINCIPAL, it records revenue equal to that total sales prices paid by customers as well as cost of goods sold equal to the cost of the item to the company.

If a company is an AGENT, it records as revenue only the commission it receives on the transaction.

77
Q

To record construction costs: (Debit/Credit)

A

Debit: CIP
Credit: Various accounts

78
Q

To record progress billings: (Debit/Credit)

A

Debit: Accounts Receivable
Credit: Billings on Construction

79
Q

To record cash collections: (Debit/Credit)

A

Debit: Cash
Credit: Accounts receivable

80
Q

To record gross profit: (Debit/Credit)

A

Debit: CIP
Debit: Cost of Construction
Credit: Revenue from long-term contracts

81
Q

To record expected loss: (Debit/Credit)

A

Debit: Cost of Construction
Credit: Revenue from long-term contracts
Credit: CIP

Intermediate Accounting I :!: (6 decks)

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