F2 Flashcards
List the steps associated with the five-step approach to revenue recognition.
Step 1: Identify the contract with the customer.
Step 2: Identify the Separate performance obligations in the contract.
Step 3: Determine the Transaction price.
Step 4: Allocate the transaction price to the separate performance obligations.
Step 5: Recognize revenue when or as the entity satisfies each performance obligation.
ISTAR
What criteria must be met in order for a performance obligation to be considered distinct?
The promise to transfer the good/service is separately identifiable from other goods or services in the contract.
The customer can benefit from the good/service independently or when combined with the customer’s own available resources.
Define the transaction price when recognizing revenue.
The transaction price is the amount of consideration an entity expects to receive in exchange for transferring goods/services to a customer.
What factors should be accounted for when determining
the transaction price?
The price should take into account (if applicable):
* Variable consideration
* Significant financing
* Noncash considerations
* Consideration payable to the customer
Describe how allocation works when a contract contains more than one performance obligation.
For contracts with more than one performance obligation, the overall contract transaction price should be allocated among each obligation based on the stand-alone selling price expected for satisfying each unique obligation (along with applying any discounts and/or variable consideration).
Describe how revenue recognition differs when performance is satisfied over time versus at a point in time.
Revenue is recognized based on measuring progress toward completion using either output or input methods when the performance obligation is satisfied over time. In order to recognize revenue when performance is satisfied at a point in time, the customer must obtain control of the asset.
How is a change in an accounting estimate reported?
Prospectively
How is a change in accounting principle reported?
Cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earliest year presented.
Prior period financial statements are restated, if presented.
What are the special exceptions to the general rule for the reporting of changes in an accounting principle?
How are these exceptions reported?
Changes where it is impracticable to estimate the cumulative effect adjustment, e.g., a change to LIFO from another method of inventory pricing under U.S. GAAP or a change in depreciation methods.
Such exceptions are accounted for prospectively, like a change in accounting estimate.
Name the three types of accounting changes.
Change in an accounting principle
Change in accounting estimate
Change in accounting entity
Under U.S. GAAP, how is a change in the accounting entity reported?
All current and prior period financial statements presented are restated.
How are error corrections reported?
Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated.
What four situations require adjusting journal entries in order to properly present financial statements on the accrual basis?
Cash is received before the performance obligation is met (deferred revenues).
Cash is paid before the expense is incurred (prepaid expenses).
Cash is received after the performance obligation has been met (receivables).
Cash is paid after the expense has been incurred (accrued expenses).
What is the journal entry to record the earning of deferred revenue?
Dr Deferred Revenue $XXX
Cr Revenue $XXX
What are the three rules for recording adjusting journal entries?
- Adjusting journal entries must be recorded by the end of the entity’s fiscal year, before the preparation of financial statements.
- Adjusting journal entries never involve the cash account.
- All adjusting entries will hit one income statement account and one balance sheet account.
