Chapter 6 Flashcards
Revenues
inflows or other enhancements of assets of an entity or settlements of its liabilities
critical aspect of financial reporting is
measuring and reporting revenue
5 steps to recognizing revenue
identify the contract, identify the performance obligations, determine the transaction price, allocate the transaction price, recognize revenue when (or as) each performance obligation is satisfied.
Step 1 in recognizing revenue
Identify the contract
step 2 to recognize revenue
Identify the performance obligations
step 3 to recognize revenue
determine the transaction price
Step 4 to recognize revenue
Allocate the transaction price
Step 5 to recognize revenue
Recognize revenue when (or as) each performance obligation is satisfied
customer is more likely to control a good or service if the customer has:
-Obligation to pay
-Legal title to the asset
-Physical possession
-Assumed risk/rewards
-Accepted the asset
output based estimate
Measured as the portion of the goods or services transferred to date
Revenue is recognized over a period of time if these three criteria are met
-Customer consumes the benefit
-Customer controls the asset as its created
-Asset has no alternative use.
What steps are used for contracts with multiple performance organizations
2 and 4
If performance obligation doesn’t meet 3 criteria than
recognize revenue at the point in time when obligation has been complete.
input based estimate
proportion of effort expended relative to the total effort expected to performance obligations
Good or service is distinct if it is both
-Capable of being distinct
-Separately identifiable
Not performance obligations
Prepayments, Quality-assurance warranties, right to return
A warranty is an extended warranty if either
Customer has option to purchase separately or provides service beyond quality assurance
Material right
Something the customer would not receive, otherwise, so the seller is obligated to provide it.
Estimating price involves
-Variable consideration
-Right of return
-Principal or agent
-Time value of money
-Payments by the seller
Variable consideration
portion of a transaction price depends on the outcome of future events
Difference between Principal or Agent (Performance Obligation)
Principle provides goods and services, Agent facilotates a transaction between principal and customer.
Difference between principal or Agent (Recoding revenue)
Principal: Total sales price paid by customers. Agent: Only the commission it receives on the transaction
Adjusted market assement approach
Price if the product or service were sold in the market
Ex[ected cost plus margin approach
Estimate the cost of satisfying a performance obligation then add an appropriate profit margin
Residual approach
Subtract the sum of the known or estimated stand-alone selling prices of other goods and services in the contract from the total transaction price of the contract.
Franchises
Include a license to use intellectual property, as well as initial sales of products and services transferred at the start of the franchise as well as ongoing sales over the life of the franchise.
recognizing revenue over time according to percentage of completion (equation)
(total estimated revenue * percentage completed to date) - revenue recognized in prior periods.
types of contract losses
Periodic loss, overall loss
