Chapter 6 lecture Flashcards
inflows or other enhancements of assets or settlement of liabilities from delivering or producing goods, rendering services, or other activities from the sellers ongoing central operations
revenue
revenue recognition is determined by the change in
assets and liabilities
- identify contracts with customer
- identify performance obligations in the contract
- determine the transaction price
- allocate the transaction price to performance obligations
- recognize revenue when (or as) each performance obligation is satisfied through a transfer of control
five-step revenue recognition process
what do you all need to have a valid contract
- contract has commercial substance
- The contract has been approved
- rights and obligations are identified
- payment terms are identified
- collection is probable
there is a separate performance obligation when each of the following criteria is met
- capable of being distinct
- distinct within a contract
- materiality
- does it have value
- customer can use it
- it has a value greater than the scrap value
- An example of not being this: is a cell phone that only works on one company’s network
- An example of not being this: is that specific wrench that comes with an Ikea furniture
capable of being distinct
- alarm app without an iPhone
- does not significantly modify or customize another promised good or service
- does not integrate into a bundle of goods
- An example of not being this: the alarm application on a cell phone
distinct within a contract
- we expect to get napkins with our meal
- do not have to account for a separate performance obligation if the goods or services are immaterial in the context of the contract
- An example of not this: is napkins at In-N-Out
materiality
another way of looking at number 3 in the five-step revenue recognition process
determine transaction price
how much revenue will we record
3 primary (non-exclusive) ways to determine the transaction price
- fixed consideration
- variable consideration
- consideration payable to the customer
- transaction price is fixed and easily determinable in the contract
- not contingent on other events
- the vast majority of things that we (individuals) purchase in our daily lives are fixed consideration
- counter-example: Mexican restaurant in Madison that had a price on the menu, but the lady that rang you up put a different price
- For example: you can’t negotiate at Walmart
(3 primary ways to determine transaction price)
fixed considerations
- price depends on future events or varies due to discounts or incentives
- examples: rebates, cash discounts, price concessions/discounts on volume
- use either the ‘expected value’ method or the most likely amount method
(3 primary ways to determine transaction price)
variable consideration
- payments that the seller makes to the buyer reduce the transaction price
- rebates
- volume discounts
- slotting fees
(3 primary ways to determine transaction price)
consideration payable to the customer
we will allocate transaction price to performance obligations only when
there is more than one performance obligation
whenever possible we will allocate the transaction price based on
observable standalone prices
observable standalone prices are not always available. when not, there are 3 alternative methods that can be used
- adjusted market associate approach
- expected cost plus a margin approach
- residual approach (only use if we cannot do the other)
- estimate the price a customer would pay in a market
- like the observable standalone price, except the standalone price is estimated
(which of the 3 alternative methods to observable standalone prices is this?)
adjusted market assessment approach
- determine the cost and apply an appropriate profit margin
(which of the 3 alternative methods to observable standalone prices is this?)
expected cost plus a margin approach
- use standalone prices for the performance obligations that you know and then plug the transaction price for the unknown performance obligation
- seldomly used
(which of the 3 alternative methods to observable standalone prices is this?)
residual approach
revenue is recognized
- when each performance obligation is _____
- when?
- separately or together?
- satisfied
- over time or at a point in time
- seperately
provides the good or service to the customer
principal or agent
principal
arranges for another company to provide the good or service to the customer
principal or agent
agent
determination of principal agent is based around ?
control
(if you have control, you are principal
- who has primary responsibility for fulfilling the performance obligation
- who has discretion in setting prices for goods or services
- who bears inventory risks
3 things to determine if something is the principal or the agent
