Chapter 5 - Revenue Recognition

Question 1

What is Revenue

Answer 1

inflows or other enhancements of asset
OR
settlements of it’s liabilities that constitute the central operations

Question 2

The Realization Principle - 2 criterea

Answer 2

1. seller must have substantially performed it’s obligations to the customer; the seller must have earned the revenue
2. the seller must have obtained an asset from the customer that it can reliably measure. i.e. cash or a/r

Question 3

frequent issues impacting time and amount of revenue

Answer 3

1. the sale involves bundled deliverables
2. the single sale transaction spans multiple accounting periods due to
   a. collection of the fee is spread out over multiple periods, making collectability uncertain
   b. manufacturing process spans multiple periods
   c. the sale involves variable consideration

Question 4

true or false

Revenue is always recognized in the same period as the cash is received

Answer 4

FALSE

1. A/R is established when revenue is recognized, and then offset when paid
2. Cash is received PRIOR to revenue being recognized (referred to as unearned or deferred revenue)

Question 5

When are expenses recognized?

Answer 5

1. when it consumes the assets
2. if an event or transaction leads to the recognition of revenue, firms match the consumption of any asset (the expense) with the revenue recognized

Question 6

What is the most common financial statement fraud?

Answer 6

revenue and expense recognition

Question 7

ASU Update ASU 2014-09

Revenue from Contracts with Customers

Answer 7

1. Revenue is recognized upon transfer to customer

2. The amount of revenue recognized is the amount the seller is entitled to receive

Question 8

When does CONTROL transfer to the customer?

Answer 8

When the customer has direct influence over use of the good or service obtained and it’s benefits

Question 9

indicators that control of an asset has passed to the customer

Answer 9

• an obligation to pay the seller
• legal title of the asset has transferred
• physical possession of the asset has transferred
• the customer assumes the risks and rewards of ownership
• customer has accepted the asset

Question 10

Criteria to recognize revenue over a period of time. must meet ONE of these…

Answer 10

1. customer consumes the benefit as the work is done e.g. cleaning service
2. customer controls the asset as it’s created e.g. building an office building
3. the asset has no alternative use to the seller, and if the project stops the seller has legal right to collect payment for progress to date

Question 11

True or False

Having delivery scheduled means that control has passed from the seller to the buyer

Answer 11

FALSE

Question 12

2 ways to estimate progress towards completion

Answer 12

output based

input based

Question 13

output based estimation for estimating completion

Answer 13

measures the proportion of goods transferred to date e.g. passage of time on a phone service contract

Question 14

input based estimation for estimating completion

Answer 14

measures the proportion of effort expended so far (e.g. percentage of completion)

Question 15

5 Steps to recognizing revenue for contracts with multiple performance obligations

Answer 15

1. identify the contract
2. identify the performance obligations
3. determine the transaction price
4. allocate price to each performance obligation
5. recognize the revenue when each performance obligation is satisfied

Question 16

A good or service is a distinct performance obligation if it’s both…

Answer 16

1. capable of being distinct

2. separately identifiable from other goods or services in the contract

Question 17

Accounting for Customer Returns

Answer 17

if expected to be material, they must be estimated in the period of sale
dr sales returns (contra sales revenue)
cr allowance for sales returns (contra A/R)

the estimate will change with new information

Question 18

bill and hold arrangement

Answer 18

the customer buys the item and title is exchanged, but requests that you hold it for a while before shipping

Question 19

is the seller a principal or just an agent?

Answer 19

Principal-delivers goods, assumes risks associated with delivery and holding inventory
agent–job is to FACILITATE delivery between a principal and customer

Question 20

recording revenue - difference between a principal and agent

Answer 20

principal - able to recognize total price paid by the customer and also recognizes COGS
agent - only records the revenue of the commission received (e.g. groupon)

Question 21

when must sellers account for the time value of money?

Answer 21

if the contract contains a significant financing component or time between exchange and payment is over a year

Question 22

variable consideration

Answer 22

circumstances where the exact amount of the payment is not known.
must estimate the value by
–the expected value
–the most likely amount

Question 23

The five key steps in applying the core revenue recognition principle are…

Answer 23

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