Module 8

Question 1

What is the first step in 5 step approach?

Answer 1

look at contract

Question 2

What is a distinct performance obligation?

Answer 2

What are we actually selling?` What do I actually have to do to sell you the thing?

Question 3

What is 5 step approach?

Answer 3

1. Identify the contract
2. Identify the distinct performance obligations
3. Determine the transaction price
4. Allocate the transaction price to each performance obligation
5. Recognize revenue when each performance obligation is satisfied

Question 4

What are issues that arise with recognizing the transaction price?

Answer 4

Gross vs net, right of return and variable consideration

Question 5

If there are rights of return…

Answer 5

you need allowance accounts

Question 6

When an item is returned, does it effect the P&L?

Answer 6

no, balance sheet only

Question 7

What are some potential signs of estimation errors?

Answer 7

 Changes in the liability account that are large relative to the amount of revenue recognized.
 Large gains (losses) recognized in other income (expense).

Question 8

What are complications of long-term contracts:

Answer 8

 Performance happens at discrete points in time (e.g.,
Amazon Web Services).
 There are multiple elements (see later example).
 Measuring percentage of completion (see later
example).
 There is variable consideration (see later example).

Question 9

What is the most common measure of completion methond?

Answer 9

Actual cost as a percentage of estimated total cost is, Other metrics are allowed—e.g., percentage of
estimated time to complete, etc.

Question 10

When accruals (i.e., ∆NOA) are very high or very low, 
profitability tends to mean revert very quickly. True or False

Answer 10

True