Revenue, inventory and cost of sales Flashcards
what is Cash accounting?
Recognise income when cash is received from a customer.
Recognise an expense when payment is made to a supplier
what is Accruals accounting?
Recognise income as it is earned.
Recognise expenses when the entity receives the benefit (incurred)
what does cash accounting NOT do?
Doesn’t take account of the re-use of equipment (property, plant and equipment).
Doesn’t allow for left-over inventory.
Doesn’t match the cost of each item sold to the income from selling it (gross profit).
why is timing of recognition on revenue critical?
impact on profit
meeting targets
affecting staff bonuses
Impression given to future customers and investors
what does IFRS15.2 say about revenue?
… an entity shall recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.
IFRS15.2
IFRS 15.2 explained
Revenue should be recognized to show when a company delivers promised goods or services to customers, reflecting the payment the company expects to receive in return.
Think of it like a restaurant: when you order a meal, the restaurant prepares and serves it. They recognize revenue once the meal is delivered, and the price on the menu reflects what they expect to be paid for it. Just as the restaurant wants to ensure they’re compensated for the meal they provided, companies recognize revenue based on the value they expect to receive for their goods or services.
what does IFRS 15.31 say about revenue?
An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.
IFRS 15.31
IFRS.31 simplified
Revenue is recognised when a company delivers a promised good or service to a customer. This happens when the customer gains control of that item.
why is timing of revenue recognition critical?
impact on profit
meeting targets
affecting staff bonuses
Impression given to future customers and investors
Potential for fraud and manipulation
eg tesco
what is meant by receiving revenue over time?
Customer receives benefit as service provided
Entity has right to payment for work completed
eg paying for a data service
what is meant by receiving revenue at a point in time?
At a point in time:
When the customer receives the goods when the event takes place
Physical possession
Risks and rewards of ownership
Acceptance of asset
eg buying a new phone in full
from revenue at a point in time when would the customer receive the benefit
When the event takes place
eg if a ticket is sold and the events not happened you may recognise revenue (dr cash, cr revenue) however, at year end if the revenue has not been earned we then derecognise it, this means if its a debit we credit it (dr revenue, cr contract liability) and turn it into a contract liability as you still owe a service, if you have rendered a service and the customer hasnt paid you turn it into a contract asset as revenue hasnt been recognised
once the event takes place we can then recognise this revenue from contract liability debiting it then credit revenue as it goes up once the event has occurred, this is when the customer receives the benefit
other words for a contract liability are…
deferred income and unearned income
another name for a contract asset is…
accrued income
IFRS 15.22
A performance obligation is “a promise in a contract with a customer to transfer to the customer … a good or service that is distinct … “ (IFRS 15.22).
how do you know when a good or service is distinct?
the customer could benefit from the good or service on its own, or with other resources that are readily available; and
the promise to transfer the good or service is separately identifiable within the contract.
what is a bundled contract?
contract may include more than one ‘performance obligation’
eg Mobile phone + data plan
Computer system + technical support
Machine + maintenance support
what is a transaction price?
the price the business and the customer have agreed upon based on the contract
eg £30 upfront and £54 monthly for 36 months
upfront: £30
36 x 54 = 1944
transaction price = 1974
example of relative stand alone method
Transaction:
1 Jul 23 : Sale of a phone and data plan together to a customer with the following terms:
- Upfront cost :£30; Monthly payment of £54 for 36months.
The price of phone only is £799, and data plan only is £40 per month for 36months.
How much revenue should the company recognise in their financial statements for the year ended 31 December 2023?
transaction price: 1974
phone: 799
data plan: 40
40 x 36 = 1440 + 799 + 2239
- transaction price (1974) = 265 (discount)
799/ 2239 x 265 - 94.6
1330/ 2239 x 265 = 170.4
799 - 94.6 = 704.4
1440 - 170.4 = 1269.6 for 36 months
1269.6/ 36 = 35.3 per month x 6 = 211.8
211.8 + 704.4 = 916.2
how do you allocate revenue using the relative standalone price?
underline dates
find transaction price = total price
find good prices
find total eg 30 for 2 months = 60
add goods together and take away from transaction prices
this gives you a discount price
now do good A/ transaction price x discount price take this away from Good A
also do good B/ transaction price x discount price take this away form Good B
added together you should get the transaction price
divide by the amount of months and times it by the amount of months you need
when the price of only one component has been given we use the residual approach and we find whats left over
explain how to allocating revenue via the residual approach
use this when theres a question with only one component has been given eg only price of phone and not data plan
underline dates and find the difference
how many items given?
find the transaction price for total number of months
transaction price - price of good
divide by number of months and times by amount of months the question says
add this to price of the original good
example of residual method
Transaction:
1 Jul 23 : Sale of a phone and data plan together to a customer with the following terms:
- Upfront cost :£30
- Monthly payment of £54 for 36months.
The price of phone only is £799,
How much revenue should the company recognise in their financial statements for the year ended 31 December 2023?
july to december = 6 months
how many phones? 1
54 x 36 = 1944 = 30 = 1974 transaction price for 36 months
1974 - 799 = 1175 for 36 months
1175/36 = 32.64 per month
32.64 x 6 = 196 data plan for 6 months
799 +196 = 995 for phone fot 6 months
what is consideration?
a payment made by one party to another in exchange for the transfer of something of value
what are the two ways you can recognise revenue for long contracts?
ouput and input methods
