Classification and Measurement Flashcards
What is revenue recognition
companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to recieve in exchange
When is revenue recognized?
when the performance obligation is satisified
Step 1 revenue recognition
Identify the contract with a customer
-contract estabilshes the legal rights and obligation of the seller and the customer
-need to have. contract to have revenue
Step 2 revenue recognition
Identify the performance obligation(s) in the contract
-seller can have 1 or more performance obligations
Step 3 revenue recognition
determine the transaction price
-the transaction price is what the seller should receive from the customer
Step 4 revenue recognition
allocate the transaction price to each performance obligation
-if there are multiple p.o.s the contract price is allocated among them
Step 5 revenue recognition
recognize revenue when- or as - each performance obligation is satisfied
-at a point in time or over time depending on how the p.o. is satisfied
Revenue recognition practice from lecture notes
cash
money or currency a firm has on hand r in checking accounts, and items acceptable for deposit such as check and money orders
cash equivalents
items such as money market funds, short-term certificates of deposit and treasury bills.
-typically investments with maturity dates of less than 3 months or less are considered cash equivalents
Restricted Cash
cash not available for current use, usually reported as investments or other assets
What are accounts receiveable?
-funds owed to a firm from the sale of goods and services
sales on credit
when companies sell to other companies they offer credit terms (or credit sales or sales on account)
what is the initial valuation of a/r?
the amount of the credit sales
what is the subsequent valuation of a/r
at the amount expected to be received (net realizable value)
what 2 things are estimated to determine the net realizable value?
- the amount that won’t be collected because people don’t pay (called uncollectibles)
- the amount that won’t be collected because of sales returns
uncollectible a/r
bad debts: customers who don’t pay the amount they owe
Allowance for uncollectible accounts (provision method) (4 things)
-estimate future bad debts and match the expense against the related revenues in the same period as the revenues are recognized
-write off accounts receivable when it becomes uncollectable
-the amount of expected uncollectible accounts is usually computed based on an aging analysis or a simple precentage
-matches expesns to the same period as revenues
uncollectable accounts example (lecture notes)
What is Inventory?
assets consisting of goods owned by the business and held for resale or for future use in the manufacturing of goods for sale
what costs should be included in inventory?
should include costs of the goods plus all the costs required to btain physical posession and to put the merchandies in saleable condition
two types of inventory?
merchandising inventories and manufacturing inventories
merchandising inventories
physical form of the goods is not altered prior to sales
cost of merchandising inventories
cost = purchase price + [taxes, duties, freight, storage, insurance during transit, etc] - [discounts and allowances, purchase returns, purchase discounts]
What are manufactuing inventories?
physical form of the goods is altered prior to the sales
categories of manufacturing inventories
1 raw materials
2 work in process inventory
3 finished good inventory
manufacturing inventories cost
cost = raw materials + direct labor cost + indirect factor costs (electricity, depreciation of equipment and building, supervisory salaries, supplies, etc.)
What are the Inventory cost flow assumptions
firms purchase or manufacture products at different times and different costs
-which units were sold and which are still in inventory?
-how should dollar amounts be assigned?
-most important issue in inventory accounting
inventory costing methods
specific identification
FIFO
LIFO
Avg cost
inventory costing -specific identification
keep track of each item individually
inventory costing- FIFO
assumes that the first unis purchased are the first to be sold
inventory costing - LIFO
last units purchased are the first sold (only in us - inaccurate)
inventory costing - avg cost
units are sold without regard to order of purchase, instead computes cogs and ending inventories based on a simple weighted average
COGS Equation
beginning inv + inv purchase = goods available for sale (ending inv + cogs)
Inventory costing example from lecture
What are Investments?
includes investments in other entities debt securities and equity securities.
-accounting for these can be wildly ddifferent
6 ways of recording investments
-consolidation
-equity method
-fair value method
-held to maturity
-trading debt
-available for sale
Attributes Property plant and equipment (ppe)
-actively used in operations
-long term periods of service utility
-physical substance
-often make up largest asset amounts
-PPE include natural resources
How is ppe reported on the balance sheet
reported at historical cost less accumulated depreciation (book value)
-if impairment of value, write down to reflect lower fair market value
which expenditures should we include in historical cost
all costs nescessary to acquire an asset and make it ready for use
what does historical cost include
purchase price and other related costs like sales tax, transportation costs, installation, testing, legal fees to establish title, recording fees and any other costs to get asset ready for use
What is the difference between Capitalization and expense in terms of financial reporting?
should long lived asseets be capitalzed (placed on balance sheet) or expensed (immediately reducing net income)
Capitalization vs expense example from lecture
What is Depreciation?
a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage, over the estimated life of the unit, in a systematic and rational manner
-process of allocation not valuation
What estimates are needed for depreciation?
useful life
salvage value
depreciation rate
depreciation estimates - useful life
period of time over which the asset is expected to generate cash inflows
depreciation estimates-depreciation rate
depreciation rate - estimate of how the asset will be used up over its useful life
depreciation estimates - salvage value
expected disposal amount for the asset at the end of its useful life
Depreciation methods
Straight-line method
accelerated methods
activity based methods
depreciation methods - straight line
depreciation expense is recognized evenly over the estimated useful life of the asset
depreciation methods - accelerated methods
double declining-balance - depreciates assets twice as quickly
depreciation methods - activity based methods
units of production
Impariment of value
ppe should be written down if there has been a significant and permanent impairment of value
-most long term assets an impairment test id one whenever there is a triggering event
triggering event
with impairment of value, a triggereing event is certain events or changes in cricustances that raise the possiblitiy that certain long-lived assets may be imparied
What are Intangible assets?
-have no physical substance
-not financial instruments
-convey certain legal and economic rights
-uncertainty associated with future economic benefits
(very conservative with these estimates)
Types of intangible assets and definitions
Identifiable - patents, copyrights, trademarks, franchises, license
unidentifiable- goodwill (only recognized with purchase of other business)
How are intangibles acquired? When can you capitalize the costs?
externally - can capitalize purchase cost and other related costs
internally - can only capitalize direct costs like legal fees. all other related costs are expensed as incurred
What are Current liabilities? (Time Periods)
probable future sacrifices of economic benefits arising from present obligations to other entities resulting from past transactions or events
current liabilities are…
-obligations payable within 1 year or one operating cycle, whichever is longer
-expected to be satisfied with current assets or by the creation of other current liabilities
ex- accounts payable cash dividedns payable, accrued expesnses, unearned revenues, taxes payable, short-term notes payables
-current liabilities are considered more risky than noncurrent liabiliities
-usually reported at their maturity amounts
Long term debt
obligations that extend beyond one year or the operating cycle, whichever is longer
examples of long term debt
bonds payable, notes payable, mortgages payable, pensions, leases
long term debt…
-signifies creditors interest in a companys assets
-requires the future payment of cash in specified amounts, at specified dates
-mirror image of an asset
-as time passes interest accrues on debt
-debt is reported at the present value of its related cash flows (principal and or interest payments, discounted at the effective rate of interest at issuance
Most common type of corporate debt?
bonds
One advantage of bonds?
they divide a large liability into many smaller liabilities
How long on average does it take for bonds to mature?
10-40 year
What payment and when are made on bonds?
bonds require the payment of the stated amount at maturity and interest at a stated rate
Stated amount (bond) (principal, par value, face amount, maturity value)
the amount used to determine cash interest payments and the amount paid back at maturity
Stated rate (coupon rate, nominal rate)
the interest rate used to determine cash interest payments
Market rate (effective rate)
the going interest rate of simlarly risky debt
Effective interest method
interest accrues on an outstanding debt at a contstant percentage of the debt each period. Interest each period is recorded as the effective market rate of interest multiplied by the outstanding balance of the debt (during the interest period)
-interest is recorded as expense to the issuer and revenue to the investor
Bond example (s) from lecture
Types of shareholders equity
by business structure
-sole proprietorship
-partnership
-corporation
Common stock
-share proportionately in profits or losses
-owners of the company (voting rights)
-residual interest
-preemptive rights
Common stock common values
par value
authorized
issued
outstanding
common stock par value
somewhat arbitrary amount used to determine legal capital, stated in the charter. When stock is issued for more than par value, the excess is reported in the account, paid in capital in excess of par
common stock authorized value
maximum number of shares distributed to stockholders (not retired)
common stock outstanding value
number of shares currently held by stockholders outside the corporation
preferred stock
-some rights of ownership
-preference over common stock (but not debt) in dividends and or liquidation
Treasury stock
-represents reacquisition of the firms shares from shareholders
-a contra equity account
Retained Earnings
Accumulation of earnings minus dividends
Dividends
-cash - only one that affects RE
-stock
-stock splits
Capitalization
the process of recording an expense as an asset on a company’s balance sheet instead of an expense on the income statement
-consolidation
- equity with control
-equity method
- equity with significant influence
-fair value method
- equity with significant influence
-held to maturity
- debt with intention of holding to maturity
-trading method
debt with intention of holding for short period to get a gain
-available for sale
- debt without the previous intentions
what are capitalized costs?
-costs included in asset account are called
What is Capitalization?
an accounting method in which a cost is included in an asset’s value and expensed over the asset’s useful life, rather than expensed in the period the cost was incurred.
What is periodic interest?
the effective interest rate (market rate) times the amounts of the debt outstanding during the interest period
(known as the book value or
carrying value
Historical Cost less Accumulated Depreciation
-periodic interest
is the effective interest rate (market rate) times the amounts of the debt outstanding during the interest period
interest expense formula
carrying value * market rate of interest during period
carrying value
Historical Cost less Accumulated Depreciation
