F2 Flashcards
Modules 1-8
Revenue Recognition
Revenue should be recorded as service is rendered. If a company has an agreement for installment payments but they already provided the full service, they have to record the full payment revenue.
Revenue should be recognized when the services are completed and ready to transfer.
Deferred (unearned) Revenue
Deferred or unearned revenue.
A liability until the service has been performed.
Deferred revenue on the books of one company is a prepaid expense in the books of another company.
Recognizing refund liability
Refund liability represents the amount an entity does not expect to receive. If a company cannot reasonably estimate returns, they cannot book revenue at the time of sale.
Recognized as an Asset
Commission costs are recognized as an asset.
Design costs/ printing costs should be expensed as cost of sales.
Recognize revenue for a sale when:
When the order is delivered to the customer because that is when the performance obligation is satisfied.
Most appropriate way to assign discount:
Allocate proportionally to all obligation
Treatment of multiple-service related performance obligations
Buyer is able to benefit from each service independently.
The promise to deliver each service is separately identifiable.
Income recognized second year
Income previously recognized would be used to calculate income recognized in the second year.
Progress billings to date have no impact on recognized income in the second year.
Contract Modification
The scope of the original contract increases through the addition of distinct goods or services.
A contract modification represents a change in price or scope (or both) of a contract approved by both parties.
The modification is treated as a new contract if the scope increases because of the addition of distinct goods or services and the change in contract price represents stand-alone prices.
If a contract modification occurs where distinct goods or services are added, but the contract price does not increase by the stand-alone prices, this would result in termination of the orig. contract and the creation of a new combined contract.
Consignor V. Consignee
Consignor maintains inventory on its books (the one who owns the supplies).
The consignee records the commission revenue but not inventory.
Input vs. Output methods to recognize revenue
Output: Milestones Achieved (whether production or distribution related)
Input: Resource consumption, labor hours expended, costs incurred relative to expected costs.
Recognize a current liability
A liability only exists when progress billings exceed costs and estimated earnings.
Current asset: excess of accumulated costs plus estimated earnings or gross profit over elated billings
Earnings when revenue is recognized over time
- Calculate estimated profit: contract price - total costs
- Percentage completed: Accumulated or incurred costs/ total costs
- Calculate Gross Profit Earned to Date: gross profit (step 1 calc) x percent completed
Expected losses on contracts
Expected losses on contracts are recognized prior to job completion (conservatism).
Expected losses are recognized immediately in their entirety.
Expected profit is not recognized until completion.
Correcting Accounting Error
Financials should be restated, an offsetting adjustment to the cumulative effect of the error should be reflected in the carrying amounts of assets and liabilities.
An error correction is accounted for by adjusting prior period financial statements to correct the error.
A change in estimate is made prospectively. No cumulative effect adjustment is made, and no separate line-item presentation is made on any financial statements. If a material change is made, appropriate footnote disclosure is necessary.
The correction of an error in the financial statement of a prior period should be reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance. Corrections of errors of prior periods go to retained earnings and do not affect the income statement.
Error corrections are not accounting changes.
If comparative financials are presented and financial statements for error year are presented, correct the error for that year only.
if comparative financials are presented but not for the error year, only adjust the beg. retained earnings, net of tax for the earliest year presented.
If comparative financials are not presented, then correct the beg. retained earnings, net of tax for that year presented.
**When correcting prior period error, always do calculations net of tax to adjust to what the balance should be.
Cash Basis to Accrual Basis
A change from a non-GAAP method is an error correction that is accounted for by adjusting beg. retained earnings.
A change from cash basis to the accrual basis cannot be reported as a change in accounting principle because cash Basis is non-GAAP.
A change in accounting principle must be a change from one acceptable GAAP method to another. When a change in accounting principle is recorded, beg. retained earnings is adjusted for the cumulative effect of the change. Net Income is no longer adjusted for the cumulative effect of a change in accounting principle.
A change from cash to accrual is a prior-period adjustment and are accounted for using retroactive restatement. Prior period adjustments are never accounted for prospectively.
Accounting Estimates
If it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate and accounted for prospectively. A component of income from continuing ops, in the period of the change and future period if the change affects both.
More difficult to determine if a change is a change in accounting principle(retrospectively) or a change in estimate (prospectively) than it is to differentiate between a change in acc. estimate and a correction of an error because a change can be both a change in accounting principle and a change in accounting estimate. For, example, a change in depreciation method is a change in accounting principle but also a change in estimated future benefits of the asset.
Change in estimate: A change in the useful life of an asset. 2. A calculation changes of warranty obligations 3. An insurance policy that lapsed 4. The write-down of obsolete inventory
Change in estimates affecting current and future period must be disclosed in the notes to the financial statements if the changes are material.
Changes in ordinary accounting estimate do not have to be disclosed.
-settlement of litigation
- To LIFO not from
-Depreciation method
-Revisions of estimates regarding discontinued ops
-economic conditions
-product demand
NO EFFECT ON STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY.
What amount should be reported as prior period adjustment
On year 4, discovered incorrectly expensed $210,000 machine purchased on Year 1. Useful life of 10 years and salvage value of 10,000. Uses straight-line depreciation and subject to 30% tax rate. On dec. 31, year what amount should be reported as prior period adjustment:
Calculate annual depreciation: $210,000 cost - $10,000 salvage value/10 years= 20,000 depreciation expense per year. accumulated for year 1, 2 and 3 = 60,000.
Prior period adjustment: 60,000 - 210,000 = 150,000
net of tax: 150,000 x 0.70= 105,000
Change in accounting principle
Ex: changing from LIFO TO FIFO
Report cumulative effect of the change as an adjustment to beg. retained earnings, net of tax in the earliest year presented if comparative financial statements are presented.
The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beg. of the period of the change and what retained earnings would have been if the change was applied to all affected prior periods.
Retrospective approach for changes in accounting principle. Always adjust beg. retained earnings, net of tax
An accounting principle may be changed only if:
-required by GAAP; or
-Alternative principle is preferred and presents the info more fairly.
–Cannot do income smoothing
(switching accounting methods in order to show lower expenses or lower costs of goods sold)
For comparative financial statements ( when you provided financials for prior years to compare with current year), adjust beg. retained earnings for the earliest ear presented.
If switching TO LIFO use the estimate accounting change rules (prospectively)
Change in depreciation, amortization, or depletion is considered both a change in accounting principle and a change in estimate.
A change in depreciation method
A change in depreciation method is considered to be both a change in method and a change in estimate.
These changes should be accounted for as changes in estimate and handled prospectively. The new depreciation method should be used at the beg. of the year of change and should start with the current book value of the asset. No retroactive or retrospective and no adjustments to retained earnings. The cumulative effect should not be reflected on the income statement.
No change to income statement or retained earnings.
Change in entity
Retrospectively.
Change in entity:
1. Changing from companies in consolidated financial statements.
2.Consolidated financial statements versus previous individual financial statements.
Change from cost method to equity requires restatement; change from equity to cost does not require restatement and accounted for prospectively.
-Full disclosure of the case and nature of the change
-Include changes in income from:
Continuing ops, Net Income, Retained Earnings
Adjusted entry for advances
“Advances” affect cash flow but do not affect accrual basis expense.
Matching principle
Matching principle recognizes costs in the same period as the service revenue is earned. All expenses related to the sales (revenue) generated should be recorded in the same period as the related sales.
Revenue recognized, deferred reduced.
If a service is performed evenly throughout a year, divide or multiply by 2.
Recognizing revenue
If a company has an agreement to exchange services with another company, they should account for the services exchanged once they provide their end of the deal even if they haven’t received the other company’s end of the deal.
Adjusting entry to record unearned revenue
Debit cash and credit unearned revenue to show you have received the cash but have not rendered the service.
Asset is increasing, Liability increasing and no change to equity because you have not recorded any earned revenue.
Adjusting entry for unearned revenue that has been earned
Debit unearned revenue and credit revenue to show that the service has now been rendered.
No change in asset account, Liability decreases and Equity increases because you are now recording earned revenue.
Accrued(to record without the exchange of cash)
Accrued revenue: earned but haven’t been paid
Debit accounts receivable and credit cash
Asset increases, no change in liabilities and increase in equity.
Accrued expense: Haven’t paid for an incurred expense
Debit expense and credit accrued liability.
No change in asset, liability increase and decrease in equity because of the expense.
Adjusting Entries
Income statement account and balance sheet account.
You will not be using cash account for adjusting entries.
FOB shipping:
Once shipped, buyer owns the goods and record it as inventory
FOB destination
ownership transfers once the goods are delivered to the buyer.
