Lecture 11 &12 Revenue Recognition and Receivables

Lecture 11 &12 Revenue Recognition and Receivables...

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Revenue Recognition Understand the key accounting concepts related to revenue recognition Record events for allowance method. To begin to appreciate the judgment that is typically needed to implement these concepts
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Revenue Recognition The general guideline for revenue recognition is: Revenues are recognized when: (1) The company has delivered the goods for performed the services. (2) The company has received cash, or a valid promise of future payment. Deliver Deliver a Product or Service Collect Collect cash
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Revenue Recognition Cash Collection Versus Revenue Recognition Period 1 Period 2 Period 3 Scenario 1: Revenue Earned Cash Received + Cash (A) + Revenue ( SE) Scenario 2: Revenue Earned Cash Received + Cash (A) -Deferred Revenue (L) + Deferred Revenue (L) + Revenue ( SE) Scenario 3: Revenue Earned Cash Received + Accounts Receivable (A) + Cash (A) + Revenue ( SE) - A/R (A)
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Revenue Recognition – basic bookkeeping Scenario 1: Cash is received at the same time with the product or service delivery. Ex 1. Liz Company painted Eric’s house in February and received $1,000 payment right away. How to record the transaction? Cash (Service) Revenue 1,000 1,000 Ex 2. In February, a retailer sold toys for $1,000 in cash. The toys cost $600. How to record the transaction? Cash Inventory (Sales) Revenue -Expenses 1,000 1,000 -600 -600
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Revenue Recognition – basic bookkeeping Scenario 2: Cash is received before the product or service delivery. Ex 1. In January Liz Company received $1,000 advance from Eric and then painted Eric’s house in February. January Cash Unearned Revenue 1,000 1,000 Febuary Unearned Revenue Revenue -1,000 1,000 Ex 2. In January, a retailer receives $1,000 from a custom for toys. The retailer delivered the toys in Febuary. The toys cost $600. January Cash Unearned Revenue 1,000 1,000 Febuary Unearned Revenue Revenue Expenses -1,000 1,000 Inventory -600 -600
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Revenue Recognition – basic bookkeeping Scenario 3: Cash is received after the product or service delivery. Ex 1. Liz Company painted Eric’s house in February and received $1,000 payment in March. February Account Receivable (Service) Revenue 1,000 1,000 March Cash Account Receivable 1,000 -1,000 Ex 2. In February, a retailer sold toys for $1,000 on credit. The toys cost $600. The retailer collect the receivable in March. February A/R Inventory (Sales) Revenue -Expenses 1,000 1,000 -600 -600 March Cash A/R 1,000 -1,000
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Revenue Recognition Why do we care about revenue recognition? Revenue has BIG impact on bottom-line profitability ==> Managers may be tempted to manage revenue to achieve profit goals . Over 40% of SEC enforcement actions on accounting issues deal with Revenue Recognition
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“... Sunbeam jammed as many sales as it could into 1997 to pump both the top and bottom lines. . .. Sunbeam either sent more goods than had been ordered by customers or shipped goods even after an order had been cancelled. … In the fourth quarter of last year Sunbeam recorded $50 million in sales of cooking grills under an ‘early
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Lecture 11 &12 Revenue Recognition and Receivables...

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