FAR - Financial Statement Acct - General Revenue Recognition

Question 1

Revenue

Answer 1

inflow/enhancement of asset/settlement of liab from delivering goods/services

Question 2

Revenue Recog Criteria

Answer 2

1) revenue is earned (goods/services provided)
2) revenue is realizable (assured of collecting A/R)
3) determine expenses incurred in earned revenue

Question 3

SEC Revenue Recog Criteria

Answer 3

1) customer arrangement leading to revenue exists
2) earned revenue
3) fixed seller price
4) reasonably assured collectibility

Question 4

Revenue Recog Criteria not met

Answer 4

when 1/more of revenue recog criteria are not met = DEFERRED REVENUE

Question 5

Installment Method

Answer 5

Version of cash basis acct -> 2 situations

1) collectibility ? = A/R collectibility is questionable,
2) extended time period = if A/R collected over time period, use installment basis

Question 6

Gross Profit Formula

Answer 6

used when applying Installment Method

1) gross profit % determined for COGS
2) GP % = (Sales - COGS) / Sales
3) when cash collected, amount rec’d is divided between recovery of cost & GP rec’d, if no cash rec’d = no profit
4) GP = cash rec’d X GP %

Question 7

Repossession

Answer 7

item sold is repossessed due to nonpayment, under installment method, remaining receivable/deferred GP are closed, inventory recorded at FMV, gain/loss recorded

Question 8

IFRS - Revenue

Answer 8

gross inflow/economic benefit from ordinary activities = increase in equity

Question 9

IFRS - sources of revenue

Answer 9

1) sale of goods
2) services
3) royalty/dividend revenue

Question 10

IFRS - revenue recognition

Answer 10

1) revenue/costs measured reliably
2) probable of economic benefits flow to seller
3) seller transfer to buy risks/rewards of ownership
4) complete stage measured reliably

Question 11

amount of sales is recognized for a firm when there is a right of return and all relevant criteria for recognition of revenue under a right of return are met?

Answer 11

Total sales for the period less actual returns less estimated returns.

Question 12

components of cash received under the installment method of revenue recognition.

Answer 12

Recovery of cost;

Gross margin.

Question 13

formula to determine the gross profit recognized in the installment method.

Answer 13

cash rec’d X GP %

Question 14

most conservative revenue recognition method

Answer 14

The cost recovery is the most conservative of the methods listed in the answer alternatives. It recognizes income slower than any other method listed.

This method recognizes no income until the cash collections exceed the cost of the equipment and would tend to overstate income the least. The cost recovery method is more conservative that the installment method, which recognizes profit on each dollar of cash collected.

Question 15

Cost Recovery Method

Answer 15

more conservative than installment method, no GP recognized on cash collections until cost of item recovered.

1) use when uncertain about cash collection
2) J/E similar to installment; however, GP recognized more slowly

Question 16

Revenue Recognized @ Completion of Production

Answer 16

Metals/Agriculture products 3 conditions are met (limited applicability)

1) relatively stable market
2) related marketing costs are nominal
3) units produced are homogeneous

Question 17

Sales with a right of return

Answer 17

Amount of net sales recognized depends when

1) six criteria must be met OR
2) after sale, when return ability expires, if 6 criteria aren’ met, sale may not be recognized as revenue until period following sale

Question 18

Sales with right of return 6 criteria

Answer 18

1) fixed seller’s price
2) buyer paid/obligated to seller & not contingent on resale
3) buyer’s obligation not changed in event of theft, destruction, damage
4) buyer acquiring for resale has economic substance
5) seller has not significant obligations for resale of product
6) amount of future returns can be estimated

Question 19

Recognition when 6 criteria are met

Answer 19

reported net sales = total sales - sales returns - est. returns

A/R reported net of Deferred GP on est. returns @ EOY, J/E similar to installment method

Question 20

Recognition when 6 criteria are not met

Answer 20

1) revenue recognition postponed until return privilege has expired/6 criteria have been met
2) Reported net sales = total sales - returns - sales with return privilege
3) A/R reported net of Deferred GP on sales with return privilege

Question 21

Goods on Consignment

Answer 21

consignor recognizes revenue when consignee sells goods

consignee selling expenses paid for by consignor

revenue isn’t recognized when consignor ships goods to consignee

Question 22

Initial Franchise Fee - revenue recognition

Answer 22

when all material services/conditions substantially performed/satisfied by franchiser (training/construction)- commencement of operations. Initially recorded as unearned until recognized as revenue.

Question 23

Franchise Fee Collectibility

1) uncertainty collectibility
2) conditions met over time

Answer 23

Questionable Collectibility

1) Installment basis
2) Cost Recovery

Conditions Met over time

1) Percentage of Completion
2) Completed Contract

Question 24

Accounting basis for franchise fee recognition

Answer 24

Accrual basis, related costs matched against revenue in same period revenue is earned

Question 25

Revenue Recognition for Long-term contracts

Answer 25

seller/contractor performs obligation over long period OR contract is completed, use 2 methods

1) completed contract method
2) percentage of completion

Question 26

Completed Contract method

Answer 26

no profit recognized until contract is complete, required if estimates of degree of completion at interim points cannot be made

Question 27

Percentage of completion

Answer 27

recognize profit over time in proportion to degree of completion. required if total project cost is estimable. Requires adjusting entry.

Question 28

construction in progress (CIP)

Answer 28

inventory acct/current asset, DEBIT WHEN COSTS INCORPORATED INTO PROJECT & Credit Materials (purchases)

Question 29

Billings

Answer 29

contra to Construction in Progress (CIP). AKA Contract Price

If CIP > cumulative billings = current asset:
[Excess of CIP over billings on contracts]

If cumulative billings > CIP = current liability

Question 30

Percentage of Completion Formula

Answer 30

(Costs incurred to date) / (estimated total cost = remaining estimated cost + cost incurred to date)

Question 31

Percentage of Completion Profit Recognition

Answer 31

profit recognized is total profit recognized to date less the total of profit of previous years

Question 32

2 types of Contract Acct Losses

Answer 32

1) overall losses: both c/c & p/c, contract is no longer profitable, total est. project cost > contract price, unique entries apply
2) single period losses: only p/c affected, occurs when total est. profit is less than GP from prior years, remains profitable, usual entries apply

Question 33

Overall loss recognition under P/C

Answer 33

Total est. cost - contract price + GP recognized in prior years

Question 34

billings on construction treated as a contra to construction in progress?

Answer 34

to avoid double counting of assets

Question 35

IFRS - if can’t use P/C method, then what method is appropriate?

Answer 35

Cost Recovery method (zero-profit) method

Question 36

when is CIP balance same for P/C & C/C?

Answer 36

when overall loss incurred

Question 37

P/C Revenue Recognition

Answer 37

Total revenue through current year based on the percentage of completion through current year, less revenue recognized for prior years

Question 38

P/C Profit Recognition Formula

Answer 38

Proportion X (total est. cost - contract price)

Question 39

Current liability under contract acct

Answer 39

No current liability is reported, because the asset balance (construction in progress) exceeds billings. Therefore, if billings > CIP = CL