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34 Cards in this Set

  • Front
  • Back
According to the revenue recognition principle revenue is recognized?
1.when it is realizable
2. when it is earned
When are revenues realized?
when goods and services are exchanged for cash or claims to cash
What are the 4 type of revenue transactions that that are recognized in accordance with the revenue recognition principle?
1. Revenue from selling products
2. Revenue from services rendered
3. revenue from permitting others to use enterprise assetss(interest,rent, royalties)
4.Revenue from disposing of assets other than products.
when are revenues earned?
when the entitiy has substantially accomplished what it must do to be entiltled to the benefits represented by the revenues
when are the revenues from sales recognized?
date of sale (date of delivery)
when are the revenues from fees or services recognized?
when the services are performed and billable
when are the revenues from interest rents and royalties recognizable?
as time passes or assets are used
Problems of implementation can arise because of
1. Sales with buyback agreements,
2. Revenue recognition when right of return exists,
3. Trade loading and channel stuffing,
If there is a sale (even if there is a transfer of
title) and the seller agrees to buy-back the product
for an amount equal to the cost of the inventory
and related holding cost?
No sale do not recognize revenue
But if the sellers buyback agreement is for less than
the cost plus holding costs?
then it might need more
careful consideration
RECORD THE _______!
revenue, cost
The price must be fixed and the buyer obligated to pay,
regardless of how much they sell it for and seller is not required
to help them sell it
– The buyer has risk of loss
– The buyer is not a “credit risk ”
– The returns can be reasonably estimated
If all 6 conditions are met?
than recognize revenue less any returns allowances
if not to any of the 6 conditions?
If NO to any, then no sale until the sooner of (1) cash collecti on or (2)
all 6 criteria become met.
XYZ sells 100 widgets for $100 to ABC on credit. There are no
rights to return or buyback. Has the revenue been earned?
Should it be recognized?
Say that the terms grant ABC the right to return the widgets
if they do not sell them?
Therefore, what questions do you have about the widgets and
ABC now?
l Can the returns be reasonably estimated?
l Is ABC a credit-worthy company?
If both are yes, then the sale should be recorded. If either is
no, then it should not yet be recorded, until the cash is
received or the criteria are met– whichever comes first.
what are the two methods of accounting for long-term construction contracts?
Pecentage of completion Method
Completed contract method
The percentage of completion method .....
recognizes revenues, costs, and gross profit as progress is made toward completion on a long term contract.
the completed contract method......
revenue and gross profit are recognized only at the point of sale- that is when the contract is completed.
What is the rationale for using the
percentage-of-completion accounting method for longterm
construction contracts?
under most of these contracts the buyer and seller have obtained enforceable rights. A continous sale occurs as the work progresses and revenue should be recognized accordingly.
When does the profession require the
percentage-of-completion method be used?
The profession requires that the percentage-of-completion method
MUSTbe used when estimates of progress toward completion,
revenues, and costs are reasonably dependable and three specific
conditions exist. They are:
1. The buyer can be expected to satisfy all obligations under the
2. The contract clearly specifies the enforceable rights regarding
goods or services to be provided and received by the parties, the
consideration to be exchanged, and the manner and terms of
3. The contractor (seller) can be expected to perform the contractual
When should the completed-contract
method be used?
1. when an entity has primarily short term contracts
2. when conditions for % of completion can not be met
3. there are inherrent hazards in the contract beyond the normal business risks.
Percentage of Completion, what is it?
Percentage completion provides a very good matching of revenue
to expense as it starts with costs incurred in determining the
amount of revenue to record– called the cost-to-cost method.
What impact do billings have on revenue recognition
under the percentage of completion method?
none, costs drive revenue
what are the three methods to determine the extent of progress toward completion?
1. cost-to-cost method
2. efforts-expended method
3. units of work performed method
What are input measures?
(costs incurred, labor hours worked) made in terms of efforts devoted to a contract
what are output measures?
(tons produced, stories) made in terms of results
What is the cost to cost basis (% of completion)?
% Complete=costs incurred/ estimated total costs
what is the formula for the TOTAL revenue to be recognized to date?
Revenue = % complete X Contract Value
what is the formula for the amount of current period revenue?
revenue to be recognized to date - revenue recognized in prior periods = current period revenue
What is recognition?
the process of formally recording or incorparating an item in the accounts and financial statements of an entity.
What is Realization?
the process of converting noncash resources and rights into money and is most precisely used in accounting and financial reporting to refer to sales of assets for cash or claims to cash.
Common reasons for departures from the sale basis?
A desire to recognize earlier in the earning process
A desire to delay the recognition of revenue beyond the time of the sale.
The SEC believes that revenue is realized and earned when ALL of the following criteria are met? (4)
1. persuasive evidence of an arrangement exists
2. delivery has occurred or services have been rendered
3. the seller's price to the buyer is fixed or determinable
4. collectibility is reasonably assured.