Lecture 4 0201 - ORIE 350 February 1 2007 Adjusting and Closing Entries Measurement Issues A Several measurement issues must be resolved when a

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    ORIE 350 February 1, 2007 Adjusting and Closing Entries
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    Measurement Issues A. Several measurement issues must be resolved when a business transaction is recorded. 1. Revenue recognition issue: when should a revenue transaction be recorded? Revenue generally is realized or realizable and earned when all of the following criteria are met:
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    i.  Persuasive evidence Persuasive evidence of an arrangement exists. This is generally some sort of purchase agreement or contract. It should follow standard practice, and standard policies should be in place and followed. Exceptional treatment is not dealt with lightly.
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    ii.  Delivery  Delivery of the goods to the buyer has occurred or the services have been rendered. A customer that makes a buy and hold arrangement (where the seller retains physical possession of the goods until the buyer needs them) with the seller would have to satisfy very detailed and specific requirements. In most cases, delivery to the buyer must be made and the legal title or all risks and benefits of ownership have been transferred to the buyer.
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    iii.  Determined Price The seller's price to the buyer is fixed or determinable. For example, support fees can be roughly estimated upon sale of a product (e.g., for a computer or telecommunication system), but this is generally not precise enough, and revenue recognition should be delayed.
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    iv. Collectibility Collectibility is reasonably assured. While certainly sale on account is recognized as revenue, other arrangements (such as a small deposit, with payments to be made at unspecified, future time) would not meet this requirement. Fixed dates are better (like net/30 in accounts receivable).
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    Accrual Basis In accounting using the accrual basis, we recognize revenue according to the rules above. In accounting using the cash basis, the transaction is recognized when cash changes hands, not before. Individuals and some businesses (e.g., professional firms) may use the cash basis when computing their taxes. We will use the accrual basis, more or less exclusively (except for a few homework problems).
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  Classification Should the purchase of an item be regarded as a capital expenditure (long term asset) or an expense? Usually, some sort of policy or rules are put in
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This note was uploaded on 03/04/2008 for the course ORIE 350 taught by Professor Callister during the Fall '08 term at Cornell University (Engineering School).

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Lecture 4 0201 - ORIE 350 February 1 2007 Adjusting and Closing Entries Measurement Issues A Several measurement issues must be resolved when a

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