Vol. 3 LM1 Income Statement Flashcards
Describe
grouping by nature
p 9
grouping together expenses such as depreciation on manufacturing equipment and depreciation on administrative facilities into a single line item called “depreciation”
Describe
grouping by function
p 9
grouping together expenses into a category such as cost of goods sold, which may include labour and materials costs, depreciation, some salaries, andother direct sales related expenses
Describe
multi-step format
p 9
When an income statement shows a gross profit subtotal, it is said to use a multi-step formation rather than a single-step format
Calculate
gross profit for manufacturing and merchandising companies
revenue - COGS
Calculate
gross profit for service companies
revenue - cost of services (that were provided)
operating profit is used synonymously with this term on the income statement
operating income
This reflects a company’s profits on its business activities before deducting taxes
operating profit
fill in the blank
____ is the top line in an income statement
p 10
revenue
Concept
The IASB *Conceptual Framework for Financial Reporting (2010), is referred hereafter as …
p 11
Conceptual Framework
How are gains and revenue different
p 11
Gains are similar to revenue, but they typically arise from secondary or peripheral activities rather than from a company’s primary business activities
Complete the statement
An important aspect concerning revenue recognition is that it can occur …
p 11
independently of cash movements.
fundamental principle of accrual accounting regarding revenue
revenue is recognized (reported on the income statement) when it is earned, so the company’s financial records reflect revenue from the sale when the risk and reward of ownership is transferred
the company would record a liability for ____ when the cash is initially received, and ____ would be recognized as being earned over time as products and services are delivered
unearned revenue ; revenue
example
unearned revenue
An example would be a subscription payment received for a publication that is to be delivered periodicially over time
five steps in recognizing revenue
- Identify the contract(s) with a customer
- Identify the separate or distinct performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies a performance obligation
The ____ within a contract represent promises to transfer distinct good(s) or service(s)
performance obligations
complete the statement
The performance obligations within a contract represent
promises to transfer distinct good(s) or service(s)
Describe
transaction price
is what theseller estimates will be received in exchange for transferring the good(s) or service(s) identified in the contract
____ is what theseller estimates will be received in exchange for transferring the good(s) or service(s) identified in the contract
transaction price
when recognized
revenue
revenue is recognized when a performance obligation is fulfilled
condition
Revenue should only be recognized
only if it is highly probable that it will not be subsequently reversed
Accounting for Combined Outputs
In a construction contract, if the various goods and services (like plumbing, electrical wiring) are not separately identifiable from other promises in the contract, how should they be treated for revenue recognition?
GPT
They should not be treated as distinct goods or services. Instead, they should be accounted for together as a single performance obligation because the customer has contracted for the combined output (e.g., the construction of a building), and the seller integrates all goods and services into this combined output.
Revenue Recognition for Performance Obligations Satisfied Over Time
How is revenue recognized for performance obligations that are satisfied over time in a long-term contract?
GPT
Revenue is recognized over time by measuring progress toward satisfying the performance obligation. This can be done using input methods (e.g., costs incurred as a measure of progress) or output methods (e.g., units produced or milestones achieved). The revenue recognized corresponds to the degree of completion of the contract.
Example of Revenue Recognition Using Cost Incurred
If a builder has incurred 60% of the total expected costs in a construction contract, how much revenue should be recognized according to the Converged Revenue Recognition Standard?
GPT
The builder should recognize revenue equal to 60% of the contract’s total consideration. If the contract specifies $1 million and the expected total costs are $700,000, with $420,000 incurred in costs (60% of total costs), then $600,000 in revenue should be recognized for the first year.
Under what circumstances are multiple goods or services integrated into a single performance obligation for revenue recognition?
Multiple goods or services are integrated into a single performance obligation when they are not distinct within the context of the contract. This happens when:
The goods or services are highly interdependent or interrelated, meaning one cannot be fulfilled without the others or they are significantly modified or customized to achieve the contract’s objective.
The bundle of goods or services is designed to achieve a combined outcome specified by the customer.