FAR 2 - Timing Issues: Matching of Revenue and Expenses, Correcting and Adjusting Accounts Flashcards
What are requirements of revenue recognition for U.S. GAAP
All four criteria must be met:
1) Persuasive evidence of an arrangement - signed contract
2) Delivery has occurred or services have been rendered - risks and rewards of ownership have been transferred
3) The price is fixed and determinable - no price contingencies
4) Collection is reasonably assured - standard collection terms
When is the revenue from the sales of products recognized? U.S. GAAP
On the date of sale
When is the revenue from the sale of using entity’s assets recognized (rental revenue, interest revenue)? U.S. GAAP
When the assets are used (i.e. as time passes)
When is the revenue from services recognized? U.S. GAAP
In the period in which services have been rendered and are able to be billed by the entity.
What are the four categories for revenue recognition in IFRS and all conditions that need to be met?
A) Sale of Goods: all following need to be met
1) Revenue and costs incurred for the transaction can be measured reliably.
2) It is probably that economic benefits from the transaction will flow to the entity
3) The entity has transferred to the buyer the risk and rewards of ownership
4) The entity does not retiain managerial involvement to the degree associated with the ownership or control over the goods sold
B) Rendering of services: all following need to be met - measured using the percentage of completion method
1) Revenue and costs incurred for the transaction can be measured reliably
2) It is probable that economic benefits from the transaction will flow to the entity
3) The stage of completion of the transaction at the end of the reporting period can be measured reliably
C) Revenue from interest, royalties, and interest: all following need to be met
1) Revenue can be measured reliably
2) It is probable economic benefits from the transaction will flow to entity
D) Construction Contracts
1) The contract revenue and contract costs attributable to the transaction can be measured reliably
2) It is probable that economic benefits from the transaction will flow to the entity
3) Both the contract costs to complete the contract and the stage of contraction completion at the end of reporting period can be measured reliably
Define multiple element arrangements? Making software, then hardware, installing, and performing post consumer support.
When multiple element arrangements, the fair value of contract must be allocated to each element (hardware, installing, etc.) Revenue is recognized separately for each element based on the revenue recognition criteria.
- doing lots of stuff for customer (making bite-sized pieces)
Define deferred credit?
When cash is received before it is earned:
Unearned interest income
Unearned rental income
DEFERRED CREDIT IS A LIABILITY
Define expenses?
Reductions of assets or increases of liability during a period of time. They stem from the rendering of services, delivering of goods. Expenses recognized in accordance with matching principle.
What is realization?
Occurs when entity obtains cash or the right to receive cash (sale of assets) or has converted a noncash resource into cash
What is recognition?
Actual recording of transaction and events in financial statements
Define matching principle
Indicates that expenses must be recognized in the same period in which the related revenue is recognized. Results directly and jointly from the same transactions or events.
Define accrual accounting?
Required by GAAP. Process of employing the revenue recognition rule and matching principle to the recognition of revenues and expenses
Define deferral?
There is cash received but revenue is not earned and expenses have not been incurred
Define accrual?
There is no cash received but revenue and expenses are recognized
1) Accrued assets - e.g. interest receivable is revenue recognized through the passage of time but not paid yet to entity
2) Accrued liabilities - e.g. accrued wages is an expenses incurred but not yet paid by the entity
3) Estimated liabilities - e.g. coupons or liabilities for warranties represent the recognition of probable future charges
Define expired costs?
Costs that expire during the period and have no future benefit
1) insurance expense
2) cogs are directly allocated to the periods in which the sales take place
3) Period costs - selling, general and administrative
