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Financial Accounting > Exam #2 > Flashcards

Exam #2 Flashcards

1
Q

Five-Step Revenue Recognition Process

A
  1. Identify Contract(s) with customer
  2. Identify performance obligation(s) in the contract
  3. Determine transaction price
  4. Allocate transaction price to performance obligations
  5. Recognize revenue when (or as) each performance obligation is satisfied through a transfer of control
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2
Q

A separate performance obligation exists when each of the following criteria is met:

A
  1. Capable of being distinct (has value to the customer)
  2. Distinct within a contract (Not a part of a bundle of goods)
  3. Materiality (>5% of contract value)
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3
Q

Is it a separate performance obligation if customer has an option to purchase additional goods and services?

A

Only if it has value to customer/customer has reason to exercise the option/it’s material.

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4
Q

3 ways to determine transaction price:

A
  1. Fixed Consideration
  2. Variable Consideration
  3. Consideration Payable to the customer
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5
Q

Variable Consideration methods:

A

Expected Value method and Most Likely Amount method

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6
Q

Expected Value method

A

Multiplying each of the possible outcomes by the likelihood each outcome will occur and then summing all of those values

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7
Q

Most Likely Amount method

A

Choosing the amount with the highest likelihood

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8
Q

Consideration Payable to the customer

A

Payments that the seller makes to the buyer to reduce the transaction price.

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9
Q

Examples and non examples of Consideration Payable:

A

Examples: Slotting fees, Expected returns, money for anticipated shortfalls, money for promotional expenses

Not Examples: Cost of inventory, Delivery Costs

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10
Q

Whenever possible, we will allocate the transaction price based on

A

Observable standalone prices

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11
Q

3 Alternate methods that can be used when observable standalone prices are unavailable:

A
  1. Adjusted Market Assessment Approach
  2. Expected Cost plus a margin Approach
  3. Residual Approach
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12
Q

Adjusted Market Assessment Approach

A

Estimate the price a customer would pay in a market

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13
Q

Expected Cost plus a margin Approach

A

Determine the cost and apply an appropriate profit margin

Cost x (1 + Profit Margin (%))

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14
Q

Residual approach

A

Use standalone prices for the performance obligations you know and then “plug” the transaction price for the unknown performance obligation.

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15
Q

Journal entry for sale of revenue that will be recognized in the future

A

Dr. Cash (+A)
Cr. Unearned Service Revenue (+L)

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16
Q

Journal entry for every month that revenue gets recorded over time

A

Dr. Unearned Service Revenue (-L)
Cr. Service Revenue (+SE)

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17
Q

Cost inefficiencies definition and effect

A

Extra costs for accidents

Subtracted from the costs incurred.

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18
Q

Principal

A

Provides the good or service to the customer

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19
Q

Agent

A

Arranges for another company to provide the good or service to the customer

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20
Q

Type of revenues for principals and agents:

A

Principal- Gross Revenue
Agent- Net Revenue

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21
Q

Journal Entry for uber as a principal:

A

Dr. Acc. Rec. (+A)
Cr. Service Revenue (+SE)
Dr. Cost of Sales (-SE)
Cr. Cash (-A)

22
Q

Characteristics of a Principal:

A

Have responsibility
Have discretion in pricing
Have inventory risk
Fulfill performance obligation

23
Q

Characteristics of an Agent:

A

No inventory risk
No discretion in pricing
Don’t fulfill performance obligation
No control

24
Q

What does principal versus agent matter?

A

Affects amount of revenue and cost of sales.

25
Q

The expected value and most likely amount methods result in different:

A

Amount of variable consideration, and transaction price

26
Q

Journal Entry for inventory costs:

A

Dr. Cost of Goods Sold (-SE)
Cr. Inventory (-A)

27
Q

Cash Discounts are classified as

A

Variable Consideration

28
Q

2/10, n/30 meaning

A

2% discount if paid in 10 days, else the entire balance is due in 30 days

29
Q

Two ways to account for cash discounts:

A
  1. Gross Method
  2. Net Method
30
Q

Gross Method

A

Assume customer WILL NOT take discount

31
Q

Net Method

A

Assume customer WILL take discount

32
Q

Income Statement format

A

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

33
Q

Net Sales Revenue =

A

Gross Sales Revenue - Returns - Allowances - Discounts

(Gross Sales Revenue - Contra-Revenues)

34
Q

Journal Entry if Customer pays discount after using gross method:

A

Dr. Cash (+A) 98
Dr. Sales Discount (-SE) 2
Cr. Acc. Rec. (-A) 100

35
Q

Journal Entry if Customer Pays After discount period after using Net Method:

A

Dr. Cash (+A) 100
Cr. Sales Discount Forfeited (+SE) 2
Cr. Acc. Rec. (-A) 98

36
Q

Net Method vs Gross Method affect on Total Revenue and Net Sales

A

Total Revenue is the same

Net Sales is different

37
Q

Journal Entry for when goods are returned

A

Dr. Sales Returns (-SE)
Cr. Acc. Rec. (-A)
Dr. Inventory (+A)
Cr. COGS (+SE)

38
Q

Journal Entry for estimation of future goods being returned

A

Dr. Sales Returns (-SE)
Cr. Refund Liability (+L)
Dr. inventory (+A)
Cr. COGS (+SE)

39
Q

Net Realizable Value or Net A/R =

A

Gross Accounts Receivable balance - Allowance for doubtful accounts

40
Q

Journal Entry for increase the allowance for doubtful accounts:

A

Dr. Bad Debt Expense (-SE)
Cr. Allowance for Doubtful Accounts (-A)

41
Q

Journal Entry to write-off a bad debt:

A

Dr. Allowance for doubtful accounts (+A)
Cr. Accounts Receivable - Customer B (-A)

42
Q

Journal Entry to recover an account:

A

Dr. Acc. Rec. - Customer B (+A)
Cr. Allowance for doubtful accounts (-A)

Dr. Cash (+A)
Cr. Acc. Rec. - Customer B (-A)

43
Q

Accounts Receivable Turnover Definition

A

How often receivables are collected during the year.

44
Q

Should an Accounts Receivable Turnover be high or low?

A

Higher is better

45
Q

Accounts Receivable Turnover =

A

Net Sales / Average net accounts receivables

46
Q

Net Sales =

A

Sales Revenue - Contra-Revenues

47
Q

Beginning/Ending Net A/R equations

A

Beginning Net A/R = Gross A/R - Beginning Allowance

Ending Net A/R = Gross A/R - Ending Allowance

48
Q

How do write-offs affect A/R Turnover?

A

They don’t

49
Q

Journal Entry for a firm offering a discount to a customer:

A

Dr. Sales Allowance (-SE)
Cr. Acc. Rec.

No COGS Entry

50
Q

Contra Revenues:

A

Sales Returns, Sales Allowance

51
Q

Allowance for Doubtful Accounts is classified as a

A

Contra Asset

Financial Accounting (3 decks)

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