Exam 3 Flashcards
What is the difference between the EPS calculation for continued operations vs discontinued ops?
In discontinued operations, we do not back out preferred dividends. (If the company isn’t doing well, its not going to be paying out dividends)
What principle was used before GAAP to recognize revenue?
the realization principle
Why was the realization standard updated?
Poorly tied to conceptual framework
Led to similar transactions being treated differently
Difficult to apply to complex arrangements
What is the core principle of revenue recognition?
Recognize revenue when goods or service is transferred to customer for the amount they are entitled to receive.
We can recognize revenue when a ______________ obligation has been satisfied and the control of goods/service has been transferred.
performance
When is revenue recognized over a period of time? (3 answers)
- customer consumes benefit
- customer controls the asset as it is created (constructing building extension)
- Seller creates a customized asset that has no alternative use and has legal right to receive payment
How is progress towards completion of an asset determined over time?
Output based estimate (proportion of goods transferred)
Input based estimate (proportion of effort expended relative to total effort)
When does a contract not exist?
If neither the seller or customer haven’t performed obligations.
The contract can be terminated by either party w/o penalty.
List some possible scenarios that don’t represent a performance obligation.
- Nonrefundable prepayments initially recorded as deferred revenue.
- Quality-assurance warranties
- Right of return
T or F: Extended warranties are performance obligations.
True
What internal control is critical in the cash receipts process?
separation of duties
What are the two objectives internal controls for cash payments?
(1) to prevent unauthorized payments
(2) to ensure that disbursements are recorded properly
How is cash handled to reduce the risk of fraud?
- disbursements made by check
-expenditures should be authorized
- checks signed by authorized individuals
-separation of duties
What does it mean if cash is restricted?
It is an amount of cash not available for use - probably being saved for future use.
____________ balances happen when a borrow is asked to maintain a specified balance in a low-interest account.
compensating
A __________ discount is a percentage reduction from the list price - happens for large customers.
trade
What is the purpose of a trade discount?
To incentivize large customers to return to you for business.
A ________ discount is intended to provide incentive for quick payment.
cash
What are the two methods for accounting for cash discounts?
- Gross Method
- Net Method
An _________ is an incentive for the customer to keep merchandise rather than returning it.
allowance
Both __________ and __________ are reduced when accounting for sales returns.
A/R
Revenue
Notes receivable can be both _______ and _______ term assets. Long term is ____ a year and short term is _____ a year.
short; long
> ; <
Interest bearing is when…..
a specified face amount, called principal is required to be paid in addition to a percentage of the face amount.
Secured borrowing is when you pledge your ________ balance as collateral for a loan.
A/R
