Cost Recovery Method Flashcards
WHAT method of revenue recognition should be used WHEN a customer collections are unreliable?
THE INSTALLMENT METHOD of REVENUE RECOGNITION
HOW would you calculate a company’s gross profit percentage?
Divide Current Year “Deferred gross profit” by Current Year Accounts Receivable (A/R)
Under IFRS, WHAT method of accounting is required for revenue recognition, WHEN outcomes cannot be measured reliably?
THE COST RECOVERY METHOD
WHAT are the four requirements for recognizing revenue from the performance of services under IFRS?
(1) THE amount of revenue can be measured reliably
(2) IT is probable that economic benefits will flow to the entity
(3) THE stage of completion can be measured reliably at the end of the reporting period
(4) COST incurred and to complete the transaction can be measured reliably
USING the “installment method” of accounting, Income Recognized equals cash collected multiplied by……..?
GROSS PROFIT PERCENTAGE
WHEN would the Installment Sales Method of Revenue Recognition be used?
(A) WHEN Installments sales are material; and
(B) there is NO reasonable basis for estimating collectability
NOTE: THIS tends to be used when the risk of NOT being able to collect is reasonably high or “indeterminate”
HOW would you identify your Deferred Gross Profit?
Installment Sales multiplied by the Gross profit Percentage on Sales = Total Gross Profit
You would take this amount and subtract any “Realized gross profit on installment sales” if given
NOTE: To identify your Accounts Receivable you would take your “Deferred gross profit” and divide that by your “Gross profit percentage on sales”
True or False.
Under the cost recovery method, INCOME is recognized even before the seller’s cost is fully recovered through cash collections.
FALSE.
NO income is recognized until the seller’s cost is fully recovered through cash collections under the “cost recovery method”
WHAT is a method to calculate the Gross Profit Percentage from a sale?
Gross profit (In the Given Period) divided by the Sales Price (Given)
Fill in the Blank.
Under the installment sales method, realized gross profit is equal to ___A___ multiplied by the __B___.
A. collections on installment receivables
B. gross profit percentage
Under the Installment Method of Accounting, when are installment sales recognized?
(1) In proportion to the cash collected
(2) By multiplying gross profit percentage times the cash collections
HOW are interest, royalties, and dividends recognized under IFRS?
WHEN it is probable that an economic benefit will flow to the entity; and
- amounts can be reasonably measured
NOTE: Interest is recognized using the effective interest method, NOT the amortized cost method
WHAT is considered the most conservative approach, WHEN recognizing income and there is doubt about eventual collectability?
THE Cost Recovery Method
WHY? - Because it recognizes income ONLY when collections exceed the cost of the asset sold
NOTE: This method is least likely to overstate income
True or False.
Cash collection is a critical event for income recognition for both the cost recovery method and the installment sales method?
TRUE.
Cash collection is a critical event for income recognition for both methods
WHY? - Because both methods recognize income on the basis of cash collected
Fill in the Blank.
The Accrual Method is considered __A__ for recognizing revenue.
A. “Normal” GAAP
