Week 4 - Revenue Recognition Flashcards
Analysis of Revenue Includes
Growth
- internal and external
quality:
- recurring vs non-recurring
- customer concentration
- seasonality vs volatility
- gross vs net revenue
revenue recognition policy changes
- consistency in revenue recognition
- new accounting standards (IFRS 15 or ASC 606)
What are the drivers and features of internal growth
Definition: Growth achieved through the company’s existing operations
Drivers:
- increased sales volume
- price increases
- new product development
- new market with existing products
Features
- low risk, sustainable, and builds on existing strengths
- relatively slow
what are the drivers and considerations about external growth
Definition: Growth achieved through mergers, acquisitions, partnership or other external means
Drivers:
Mergers and Acquisitions
- same industry: (vertical M&A - supplier, distributer) (horizontal M&A - competitors)
- cross-industry: diversification
considerations
- quick, immediate revenue increase
- high risk due to integration challenges
what happens when a company discontinues operations
Companies often divest of business segments
When this occurs, the company reports the event at the bottom of
the income statement by segregating income from continuing
versus discontinued operations
Companies are also required to segregate the discontinued
operation’s assets and liabilities on the current and prior years’
balance sheets
why segregate discontinued operations
Discontinued operations are segregated in the income
statement because they represent a transitory item
Transitory items won’t recur and thus, are largely irrelevant
to predicting future performance
what is customer concentration
Definition: the extent to which a company’s revenue
is dependent on a small number of customers
- high concentration = revenue volatility
- would be difficult if they lose major customers
seasonality vs volatility
seasonality
- predictable fluctuations
- interpret quarterly report carefully
Volatility
- unpredictable revenue over time
- high volatility could indicate underlying risks
- could be one time event
What are Sales Allowances
- rights of return
- sales discounts
- retailer promotions
Adj alloance:
DR. sales returns and allowance (RE)
CR. Allowance for returns (A)
Adj COGS
DR. COGS adj returns (RE)
CR. Inventory (A)
How to analyze sales allowances
- additions charged to Gross Sales
- allowance as a percentage of gross sales
- adequacy of the allowance amount
What are the steps in the revenue recognition rule
- identify contracts
- identify performance obligations
- determine the transaction price
- allocate transaction price to each obligation
- recognize revenue when each performance obligation is satisfied
what is Unearned (differed) revenue
- when receive cash before revenue is recorded
- recorded as unearned revenue (Liability)
- when the service or product is provided revenue is recognized and the liability is reduced
Analysis of Unearned revenue: what does it mean when it decreases or increases
decreases - the company’s current reported revenue was collected from prior periods
growth - could predict future increases in revenue and profit
what does it mean to sell goods on account
Selling goods on account carries the risk that some customers are unable to pay the amount due
Accounts receivable turnover
= sales / Avg Ar
Days Sales Outstanding DSO
= 365 / Accounts receivable turnover
DSO reveals the number of days, on average, that accounts receivable are
outstanding before they are paid.
what is evidence that AR has grown more quickly than sales
- lower AR turnover
- higher AR/sales
- lengthening of DSO
- more favorable to have a shorter DSO
- could result from deteriorating credit quality, or mix of products changes to have longer payment terms
what does a decrease in AR mean
- improving credit quality
- company is understating their allowance for doubtful accounts