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39 Cards in this Set
- Front
- Back
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What are the 2 guidelines under GAAP for recognizing revenue? |
1. Provided all or a substantial portion of the product to be delivered or services to be performed 2. Received an asset or satisfied a liability with a value the firm can measure with reasonable precision. |
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What are the 4 guidelines under the SEC for recognizing revenue? |
1. There is pervasive evidence that an arrangement exists (i.e. - contracts etc) 2. Delivery has occurred or services have been performed 3. The seller's price to the buyer is fixed or determinable 4. Collectability is reasonably assured |
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Why is it difficult for companies to apply the principle of revenue recognition? (3 examples of firms that have this issue) |
In some cases it is easy to recognize revenue (Point of sale) but some its more difficult. For example, 1. Businesses with sales that include future performance obligations, 2. Sales that involve a barter exchange of services between firms 3. Sales that bundle several products. |
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What are 4 signals that a firm is accelerating revenue recognition? |
1. Large and volatile amounts of uncollectible accounts receivable 2. Unusually large amounts of returned goods 3. Excessive warranty expenditures 4. Substantial increase in the number of days accounts receivable outstanding
These should all be reasonable stable over time |
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What are a 3 ways that firms can accelerate revenue recognition? |
1. Recording sales based on an indication of interest in a product by a customer 2. Accelerate the shipment of product and recognition of sales revenues to closely related customers at the end of the year then understate the likely sales returns 3. Create artificial sales invoices and ship/store goods in separate warehouse |
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When would you delay revenue recognition? |
When cash has been collected but other revenue recognition criteria has not been met |
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What are some examples where revenue recognition is delayed? |
1. Insurance - Customer pays up front, revenue is recognized over the life of the policy 2. Gift cards 3. Membership fees (Sams club) 4. Bundled products (software/tech support) |
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When is it appropriate to use the completed-contract method? |
When the contract price, costs, or degree of completion are not reasonably estimable. Contractors will postpone the recognition of revenue until they complete the project |
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When is it appropriate to use the percentage-of-completion method? |
When contractors can recognize a portion of the total contract price, based on the degree of completion of the work during the period as revenue for the period. |
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How does a firm recognize revenue under the installment method? |
As it collects portions of the selling price in cash. It also recognizes the COGS as a % of the cash receipt. |
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How does a firm recognize revenue under the Cost- Recovery Method? |
The firm recognizes revenue when cash is received, but will also recognize an expense for the same amount. This will continue until the cost of the sale is recovered, and then the firm will begin to recognize a gain on the sale. |
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When is it appropriate the use the installment or cost-recovery methods to recognize revenue? |
When the level of cash inflow uncertainty is high. These are conservative approaches when the future cash collections are uncertain and cannot be reliably estimated |
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What are the two criteria for recognition of expenses under GAAP |
1. Costs directly associated with revenues must be recognized as expenses in the period when a firm recognizes the revenues 2. Costs not directly associated with revenues must be recognized as expenses in the period when a firm consumes the services or benefits of the costs in operations |
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When products are sold, the firm recognizes revenue and these directly linked expenses, referred to as what type of costs? |
Product Costs |
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Costs that become expenses in the period in which the firm consumes the benefits of their services are referred to as what type of costs? |
Period Costs |
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What are some 3 of expenses that companies may use to manipulate earnings? |
1. Advertising 2. R&D 3. Maintenance expenditures |
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What are the 3 cost-flow assumptions? |
1. Weighted Average 2. FIFO 3. LIFO |
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What cost-flow assumption results in a balance sheet amount for ending inventory that is closest to current replacement costs? |
FIFO |
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When inventory costs are rising, what type of cost-flow assumption will lead to the highest reported Net income (lowest COGS) and the highest balance sheet value for inventory? |
FIFO |
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When inventory costs fall, what type of cost-flow assumption will lead to the smallest net income and the lowest balance sheet value of inventory? |
FIFO |
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What type of cost-flow assumption will result in amounts for COGS that closely approximate current replacement costs? |
LIFO |
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What type of cost-flow assumption will result in the highest COGS and lowest Net income during periods of rising inventory costs? |
LIFO |
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What cost-flow assumption do firms usually prefer for income tax purposes? |
LIFO |
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What would be an instance where Net Income would be highest using LIFO? |
During LIFO Liquidation. The firm sells more units during a period than it purchases, therefore the older COGS are used instead of current costs. This results in a lower COGS, which leads to a higher Net Income. |
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When are increases in the Market Value of inventory recognized on financial statements? |
After the inventory is sold. |
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What are 5 considerations that analysts should consider when assessing COGS and Inventory? |
1. Inventory Cost-flow assumption chosen 2. Price variation and inventory turnover speed 3. Any liquidation of LIFO inventory 4. Any physical deterioration or obsolesce of inventory 5. Financing of Inventory Acquisitions |
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Although ________ generally provides higher-quality earnings measures, ________ generally provides higher-quality financial position measures |
LIFO = higher quality earnings measures FIFO = higher-quality financial position measures |
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What is the formula for operating profit? |
Sales Revenue - COGS + SG&A expenses = Operating Profit before tax |
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What are three ways expected future payoffs can be measured? |
1. Dividends 2. Cash flows 3. Earnings |
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Why is using the Cash-flow based valuation a good concept to follow? |
1. Cash is the ultimate source of value. Resources have values due to their ability to provide future cash flows 2. Cash is a measurable common denominator for comparing future benefits of alternative investment opportunities. |
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What is the formula for Present Value of Net CF available for SE? |
PV of Net Cash Flow from Operations - PF of Net CF available for debt financing |
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How do you determine the % growth from one year to the next? |
2008 rev - 2007 rev / 2007 rev |
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What is the formula for Inventory Turnover Ratio? |
COGS/Average Inventory |
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What is the formula for calculating forecasted Average Inventory? |
Year +1 COGS/ Inventory Ratio |
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What is the formula for calculating year +1 ending inventory? |
2 (Year +1 Avg Inventory) - 2008 Ending Inventory |
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What is the formula for Average Useful Life? |
{(2007 PPE @ Cost + 2008 PPE @ Cost) /2} ------------------------------------------------------------- 2008 Depreciation Expense |
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What is the formula for projecting depreciation expense? |
2008 PPE @ Cost / Average Useful life |
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What is the formula for Compound Growth Rate |
(Year + 5 End Amount / Year + 1 Beg Amt )^ 1/# of periods |
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How do you smooth A/R |
Take the compound growth rate and multiply by the year +1 beginning inventory amount. Multiply the rest by the new totals for the following years |
