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ACCO 310 > Chapter 6 > Flashcards

Chapter 6 Flashcards

1
Q

We can sum up this chapter with

A

Risk (uncertainty)

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2
Q

attempt to address

A

when, what and how much to be recognized

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3
Q

In case writing you should always show

A

2 weak arguments as well, why your argument is better

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4
Q

recognition of losses and profits

A

losses quickly and profits slowly

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5
Q

the greater the risk of something going wrong

A

the slower you will recognize

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6
Q

major risks

A
  1. a MAJOR portion of the performance won’t be achieved
  2. big risk of not collecting some or all of purchase price (being paid)
  3. measurability (cost/revenues/profit/returns/degree of completion)
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7
Q

suggested approach to examine any scenario

A

Performance (all, some or none)
Measurability (revenues, costs and performance done)
Collectability (issue?)

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8
Q

revenue recognition does not coincide with

A

cash flows. Don’t need for all to occur at one point in time

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9
Q

PMC is used with

A

IFRS and ASPE

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10
Q

Focus with ASPE

A

earnings (income statement)

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11
Q

Focus with IFRS

A

rights and obligations (increase in assets or liabilities on balance sheet will mean recognizing revenue)

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12
Q

never forget the concept

A

MATCHING concept. Once you’ve decided what to recognize and when in a case scenario or mini question, briefly mention the costs that must be matched to the revenues

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13
Q

Multiple deliverables

A

when you can sell one item without the other

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14
Q

Split of revenues recognized

A

relative fair value of each if available or relative cost of providing the service: CASE MATERIAL

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15
Q

when to recognize revenue for production

A

before the sale: when there is no risk to seller (fuel, commodities)

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16
Q

when to recognize revenue for performance

A

most common: could be at one point or several in time

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17
Q

when to recognize revenue for collection

A

rare- applied in cases where collection is uncertain

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18
Q

collecting interest revenue on notes receivable/payable

A

the most determinable of these:

  1. prevailing rate for similar instrument of issuer with similar credit rating
  2. a rate of interest that discounts the nominal amount of instrument to current cash sales
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19
Q

Fair value method

A

IFRS/ASPE: when the FV of both elements of multiple deliverable are known –> prorate the total amount according to the proportion of fair value of each to their total separately

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20
Q

incremental method

A

ASPE: if the FV of only one is known –> use that and the balance will be deferred as the price of the other item

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21
Q

ethical issue with multiple deliverable methods

A

managers may try to over estimate the revenues they recognize up front and underestimate future liability

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22
Q

Loan provided to a customer with no interest to the cx

A

ABC company will recognize the full amount as performance is completed but part as service revenue and part as interest revenue
*do not forget to expense costs incurred

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23
Q

Barter transactions

A

non-monetary: little or no monetary assets are received as consideration when goods and services are sold –> recorded at fair value of assets received, unless fair value of those given up is easier to determine
–> if no commercial substance then record at book value

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24
Q

commercial substance

A

significant change in timing, amount or risk of expected future cash flows

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25
Q

Legal issue and contract law

A

a sale is a contract, shipping may determine when title passes

26
Q

risk

A

increase in the risk that inbound cash flow will not occur as a result of transaction: business accepts junior secured status on a debt in exchange for larger repayment amount

27
Q

timing

A

business agrees to a delayed payment in exchange for larger amount

28
Q

amount

A

business receives cash sooner in exchange for receiving a smaller amount

29
Q

if no commercial substance

A

transaction should not be recognized: sale of asset to owner of sole proprietorship, leases back to the business,

30
Q

agent vs. principal

A

ask who is bearing the risk?

agent: record revenues net
principal: sales expense gross

31
Q

cash discount

A

discount offered by seller for paying cash early on credit sales

32
Q

cash discount can be recognized two ways

A
  1. gross method

2. net method

33
Q

gross method

A

initially record sale at gross price (full price no discount)

  1. if customer pays within discount period: dr cash & sale discount (contra sales) and cr. AR
  2. if customer pays after discount period: dr. cash and cr. AR
34
Q

net method

A

company would initially record at net price = gross price - sales discount dr. AR cr. Sales

  1. payment within discount period: dr. cash cr. AR
  2. payment after discount period: dr. cash full amount (gross) cr. AR & sales discount forfeited (other revenues)
35
Q

earnings approach

A

focuses on earnings process and how a company adds value for its customers

36
Q

contract-based approach

A

focuses on contractual rights and obligations created by sales contracts

37
Q

revenue recognition earnings approach (ASPE)

A

PMC

  1. performance is achieved
    - -> risks and rewards transferred and/or earnings process is substantially complete
    - -> measurability is reasonably assured
  2. collectability is reasonably assured
38
Q

risks and rewards of ownership

A

core concept of earnings approach: who has possession and who has legal title

39
Q

shipping terms may

A

determine when legal title passes

40
Q

buyback agreement

A

loan with items being transferred held as collateral

41
Q

bill and hold transaction

A

bona fide business reasons for structuring a sale (lack of space), professional judgement must be exercised to see if classified as a sale

42
Q

Problems with earnings approach

A
  1. multiple and conflicting guidance
  2. difficult to apply bc of different views on when to recognize
  3. risk and rewards split between buyers and seller, hard to know when transferred
  4. a lot of subjectivity
  5. omit when receivables should be recorded if revenues not yet earned
43
Q

under contract based approach, contract recognized when

A
  1. entity becomes party to the contract
  2. contractual rights are collectible/measurable
  3. performance obligation is measurable
44
Q

under contract based approach, revenue recognized when

A

control passes/performance occurs –> physical control of asset and legal title
*net position = net amounts

45
Q

comparing earning and contract based

A
  1. IFRS triggers entries before ASPE, focus on balance sheet –> the difference between contract assets and liabilities in IFRS is profit/loss to be recognized on I/S
  2. ASPE’s focus on income statement what is earned
46
Q

revenues under _____ may take longer to be recognized

A

IFRS

47
Q

problems with contract based approach

A

not been tested, relatively new,

48
Q

measurement uncertainty result from

A
  1. consideration
  2. returns
  3. collectability
49
Q

consideration

A

payment relating to goods sold depends on the resale of goods by the buyer, revenue would not be recognized

50
Q

return

A

right of returns exists; might have to postpone reported sales until the privilege expired

51
Q

collectability

A

revenue is recognized and any potential uncollectible amount is accrued

52
Q

factors to consider when deciding gross or net income

A
  1. whether company acts as a principal in transaction or as an agent
  2. whether the company take titles to goods being sold
  3. whether the company has the risks and rewards of ownership of goods being sold
53
Q

revenue from sale of goods shall be recognized when ALL satisfied

A
  1. entity transferred to the buyer risks and rewards of ownership
  2. entity retains no continuing managerial involvement to the degree associated with ownership nor effective control over goods sold
  3. amount of revenue can be measured reliably
  4. probable that economic benefits associated with transaction flow to the entity
  5. costs incurred or to be incurred can be measured
54
Q

goods sold with warranty and returns not estimable

A

Dr. AR Cr. Inventory and Deferred gross profit
when uncertainties are resolved (payment received, return expired), recognize revenue
dr. COGS and deferred gross profit (liability) and cr. sale
when cash is received
dr. cash
cr. AR

55
Q

revenue recognized for bill and hold sales if

A
  1. probable that delivery will be made
  2. item on hand, identified and ready for delivery to the buyer is recognized
  3. buyer specifically acknowledges the deferred delivery instructions
  4. usual payment terms apply
56
Q

rendering of services recognized if

A
  1. amount of revenue can be measured reliably
  2. probable that economic benefits associated with transaction will flow to the entity
  3. stage of completion of transaction at the B/S date can be measured reliably
  4. cost incurred and cost to complete can be measured
57
Q

advertising commission

A

only recognize when advertisement appears in front of public

58
Q

recognize interest

A

effective interest method or other straight line method

59
Q

recognize royalties

A

accrual basis in accordance with substance of relevant agreement and degree of trust for large companies

60
Q

recognize dividends

A

right to receive payment is established

61
Q

onerous contract

A

the cost required to fulfill agreement is higher than the revenue

ACCO 310 (7 decks)

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