Understanding Income Statement Flashcards
Revenue Recognition - IFRS
the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow to the entity; and
the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Revenue Recognition - GAAP
There is evidence of an arrangement between buyer and seller. For instance, this would disallow the practice of recognizing revenue in a period by delivering the product just before the end of an accounting period and then completing a sales contract after the period end.
The product has been delivered, or the service has been rendered. For instance, this would preclude revenue recognition when the product has been shipped but the risks and rewards of ownership have not actually passed to the buyer.
The price is determined, or determinable. For instance, this would preclude a company from recognizing revenue that is based on some contingency.
The seller is reasonably sure of collecting money. For instance, this would preclude a company from recognizing revenue when the customer is unlikely to pay.
Percentage of completion (long-term contracts)
the company estimates what percentage of the contract is complete and then reports that percentage of the total contract revenue in its income statement.
Contract costs for the period are expensed against the revenue
Complete contract method (long-term contracts)
the company does not report any income until the contract is substantially finished
Billings and costs are accumulated on the balance sheet rather than flowing through the income statement.
Installment Sales
Ratio of Profit to Sales * down payment
Cost recovery method
Not recognize any profit until it exceed cost
Barter - IFRS
measured based on the fair value of revenue from similar onn-barter transactions with unrelated parties
Barter - GAAP
at fair value only if a company has historically received cash payments for such services
else, recorded at carrying amount of the asset surrendered.
Gross vs. Net revenue - GAAP
GAAP - the company is the primary obligor under the contract, bears inventory risk and credit risk, can choose supplier, reasonable latitude to establish price.
Collectibility IFRS vs. GAAP
- IFRS = more likely than not
- GAAP = likely to occur
Expense recognition principles
Matching Principle
Period Costs
expenditures that less directly match revenues
Doubtful accounts
recorded as an expense on the income statement
Warranties
estimate future expenses from warranties
recognize estimate warranty expense in the period of sale
update the expense as indicated by experience over life of the warranty
Depreciation Differences IFRS vs. GAAP
IFRS: requires component to be depreciated separately; annual review of residual value
GAAP: no component; do not explicitly require review
