CH6 - Notes.word

CH6 - Notes.word - CHAPTER 6 REVENUE RECOGNITION GUIDELINES...

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CHAPTER 6 REVENUE RECOGNITION GUIDELINES FOR REVENUE RECOGNITION : Revenue is recognized when the following criteria are met: Performance is achieved: Measurability reasonably assured Collectibility is reasonably assured EIC 141 clarifies the meaning of performance: Persuasive evidence of an arrangement exists Delivery has occurred, or service rendered Seller’s price is fixed and determinable To determine persuasive evidence of an arrangement, consider the following: Customary business practice Any side arrangements with customer The economic substance of the transaction (e.g. consignment sales) EARNINGS PROCESS : Actions taken that add value to a product or service = Important part of the busi- ness model Process varies in duration and complexity from industry to industry Revenue is recognized (recorded) when the earnings process is complete or sub- stantially complete RISKS + REWARDS OF OWNERSHIP : To determine who has risks and rewards (benefits) of ownership, need to look at whether a sale has occurred at point of delivery: Who has possession of the goods? Who has legal title? Consider the terms of sale (e.g., f.o.b. shipping point and f.o.b. destination) Revenues from manufacturing and selling are commonly recognized at point of sale Revenues from sales with buyback agreements are not recognized (not sales) if rights and risks have not been passed to buyer (the seller retains the risk) If a company sells inventory but does not deliver it (bill and hold transaction), rev- enues may not be recognized Customer acceptance provisions result in various accounting treatment (see next slide)
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CUSTOMER ACCEPTANCE PROVISIONS : Type of Acceptance Provisions Accounting Treatment Trial or Evaluation Basis No sale until evaluation period lapses or cus- tomer accepts Right of Return (Subjective) Recognize sale if company can estimate re- turns Right of Return (Objective) Recognize sale when specifications are achieved or customer sign-off CONSIGNMENT SALES : Consignor ships inventory to the consignee The consignee acts as an agent to sell the inventory Possession has transferred; however legal title remains with the seller Risks and rewards have not transferred Goods are held by seller as “Merchandise on Consignment” Not held as inventory on consignee’s books When merchandise sold, the consignee remits cash to the consignor (after deduct- ing commission and other chargeable expenses) CONSIGNOR’s BOOKS : Goods Shipped to Consignee: Inventory on Consignment xxx Finished Goods Inventory xxx Payment of Freight: Inventory on Consignment xxx Cash xxx Notification of Sale: Accounts Receivable xxx Relevant Expenses xxx Consignment Sales xxx Cost of Goods Sold xxx Inventory on Consignment xxx (Note: cost includes freight) Receipt of Cash from Sale: Cash xxx Accounts Receivable xxx
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CONSIGNEE’S BOOKS : Goods Shipped to Consignee:
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CH6 - Notes.word - CHAPTER 6 REVENUE RECOGNITION GUIDELINES...

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