Exam #2 Flashcards
Five-Step Revenue Recognition Process
- Identify Contract(s) with customer
- Identify performance obligation(s) in the contract
- Determine transaction price
- Allocate transaction price to performance obligations
- Recognize revenue when (or as) each performance obligation is satisfied through a transfer of control
A separate performance obligation exists when each of the following criteria is met:
- Capable of being distinct (has value to the customer)
- Distinct within a contract (Not a part of a bundle of goods)
- Materiality (>5% of contract value)
Is it a separate performance obligation if customer has an option to purchase additional goods and services?
Only if it has value to customer/customer has reason to exercise the option/it’s material.
3 ways to determine transaction price:
- Fixed Consideration
- Variable Consideration
- Consideration Payable to the customer
Variable Consideration methods:
Expected Value method and Most Likely Amount method
Expected Value method
Multiplying each of the possible outcomes by the likelihood each outcome will occur and then summing all of those values
Most Likely Amount method
Choosing the amount with the highest likelihood
Consideration Payable to the customer
Payments that the seller makes to the buyer to reduce the transaction price.
Examples and non examples of Consideration Payable:
Examples: Slotting fees, Expected returns, money for anticipated shortfalls, money for promotional expenses
Not Examples: Cost of inventory, Delivery Costs
Whenever possible, we will allocate the transaction price based on
Observable standalone prices
3 Alternate methods that can be used when observable standalone prices are unavailable:
- Adjusted Market Assessment Approach
- Expected Cost plus a margin Approach
- Residual Approach
Adjusted Market Assessment Approach
Estimate the price a customer would pay in a market
Expected Cost plus a margin Approach
Determine the cost and apply an appropriate profit margin
Cost x (1 + Profit Margin (%))
Residual approach
Use standalone prices for the performance obligations you know and then “plug” the transaction price for the unknown performance obligation.
Journal entry for sale of revenue that will be recognized in the future
Dr. Cash (+A)
Cr. Unearned Service Revenue (+L)
Journal entry for every month that revenue gets recorded over time
Dr. Unearned Service Revenue (-L)
Cr. Service Revenue (+SE)
Cost inefficiencies definition and effect
Extra costs for accidents
Subtracted from the costs incurred.
Principal
Provides the good or service to the customer
Agent
Arranges for another company to provide the good or service to the customer
Type of revenues for principals and agents:
Principal- Gross Revenue
Agent- Net Revenue
Journal Entry for uber as a principal:
Dr. Acc. Rec. (+A)
Cr. Service Revenue (+SE)
Dr. Cost of Sales (-SE)
Cr. Cash (-A)
Characteristics of a Principal:
Have responsibility
Have discretion in pricing
Have inventory risk
Fulfill performance obligation
Characteristics of an Agent:
No inventory risk
No discretion in pricing
Don’t fulfill performance obligation
No control
What does principal versus agent matter?
Affects amount of revenue and cost of sales.
The expected value and most likely amount methods result in different:
Amount of variable consideration, and transaction price
Journal Entry for inventory costs:
Dr. Cost of Goods Sold (-SE)
Cr. Inventory (-A)
Cash Discounts are classified as
Variable Consideration
2/10, n/30 meaning
2% discount if paid in 10 days, else the entire balance is due in 30 days
Two ways to account for cash discounts:
- Gross Method
- Net Method
Gross Method
Assume customer WILL NOT take discount
Net Method
Assume customer WILL take discount
Income Statement format
Sales Revenue
Cost of Goods Sold
—————————–
Gross Profit
Operating expenses:
…..
——————————
Operating Income
Other Revenues and Gains:
(Non-operating)
Other Expenses and Losses
——————————————
Income Before Taxes
Income Tax Expense
———————————-
Net Income
Net Sales Revenue =
Gross Sales Revenue - Returns - Allowances - Discounts
(Gross Sales Revenue - Contra-Revenues)
Journal Entry if Customer pays discount after using gross method:
Dr. Cash (+A) 98
Dr. Sales Discount (-SE) 2
Cr. Acc. Rec. (-A) 100
Journal Entry if Customer Pays After discount period after using Net Method:
Dr. Cash (+A) 100
Cr. Sales Discount Forfeited (+SE) 2
Cr. Acc. Rec. (-A) 98
Net Method vs Gross Method affect on Total Revenue and Net Sales
Total Revenue is the same
Net Sales is different
Journal Entry for when goods are returned
Dr. Sales Returns (-SE)
Cr. Acc. Rec. (-A)
Dr. Inventory (+A)
Cr. COGS (+SE)
Journal Entry for estimation of future goods being returned
Dr. Sales Returns (-SE)
Cr. Refund Liability (+L)
Dr. inventory (+A)
Cr. COGS (+SE)
Net Realizable Value or Net A/R =
Gross Accounts Receivable balance - Allowance for doubtful accounts
Journal Entry for increase the allowance for doubtful accounts:
Dr. Bad Debt Expense (-SE)
Cr. Allowance for Doubtful Accounts (-A)
Journal Entry to write-off a bad debt:
Dr. Allowance for doubtful accounts (+A)
Cr. Accounts Receivable - Customer B (-A)
Journal Entry to recover an account:
Dr. Acc. Rec. - Customer B (+A)
Cr. Allowance for doubtful accounts (-A)
Dr. Cash (+A)
Cr. Acc. Rec. - Customer B (-A)
Accounts Receivable Turnover Definition
How often receivables are collected during the year.
Should an Accounts Receivable Turnover be high or low?
Higher is better
Accounts Receivable Turnover =
Net Sales / Average net accounts receivables
Net Sales =
Sales Revenue - Contra-Revenues
Beginning/Ending Net A/R equations
Beginning Net A/R = Gross A/R - Beginning Allowance
Ending Net A/R = Gross A/R - Ending Allowance
How do write-offs affect A/R Turnover?
They don’t
Journal Entry for a firm offering a discount to a customer:
Dr. Sales Allowance (-SE)
Cr. Acc. Rec.
No COGS Entry
Contra Revenues:
Sales Returns, Sales Allowance
Allowance for Doubtful Accounts is classified as a
Contra Asset
