FAR 2 Financial Reporting and disclosures Laurence Flashcards
What is a refund liability and how to recognize it
The refund liability represents the amount an entity does not expect to be entitled to receive. The remainder is recognized as sales revenue.
DR Cash
CR refund liability
CR sales revenue
Upon the customer return:
DR refund liability
CR Cash
Definition Deferred Revenue
Deferred revenue is a liability until the service has been performed.
Give an example of when a change in accounting principle is inseparable from a change in accounting estimate.
An example of this situation is a change in depreciation method. It is a change in accounting principle but also a change in the estimated future benefits of the asset. The change is then considered and treated as a change in accounting estimate and accounted for prospectively.
Change from cash basis of accounting to the accrual base of accounting in current year is treated as..
An error, because cash basis of financial reporting is not part of US GAAP. Correction of an error from a prior period is a reported as prior period adjustment to retained earnings (net of tax as an adjustment of the opening balance).
How to deal with prior period error in depreciation?
Prior period errors in deprecation will be fixed in accumulated depreciation and not in depreciation expense. Depreciation expense should reflect appropriate expense amount. Accumulated depreciation (and original depreciation expense) are booked at gross level so adjustment will be done to accumulated depreciation. Any fixes (retrospectively) in accumulated depreciation will be booked against retained earnings.
Understatement of ending inventory has what kind of impact on COGS and net income?
Understatement of ending inventory results in an overstatement of COGS and understatement of net income.
What does FOB destination mean in sales?
That you can recognize the sales only when the customer had received the goods.
