Module 5 notes

Module 5 notes - Acct 6015 Module 5 notes In this chapter...

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Acct 6015 Module 5 notes In this chapter we focus on the Income Statement In particular, on the operating income elements of the Income Statement—what they are, where they come from, how they are reported, and what they tell you about a firm. Operating income Sales or service revenues COGS, depreciation, salaries, rent , utilities, advertising Research and development Restructuring Income Taxes Extraordinary items Operating asset write downs Gains and losses on disposal of operating assets Foreign currency translation gains/losses We will concentrate on Revenues Restructuring costs Income taxes Foreign currency translation gains/losses Extraordinary items EPS REVENUES Revenue is earnings of a firm before the expenses are netted out. Two criteria: Earned (seller provides goods or service Realized or realizable (buyer pays or makes reasonable promise to pay) Sounds very simple, but there are many many exceptions, including: Right of return (by buyer) Consignment sales (when is it a sale? When consignee sells it) Continuing involvement in product resale (seller keeps possession until buyer resells) Contingency sales (contingent on buyer approval) Unearned revenues—cash received in advance for product or service. Recognized when product is given to buyer, or when service is performed. IF service is over time (eg rent, insurance) then it expires as time passes. Over 70% of SEC enforcement actions deal with revenue recognition. Some typical problem areas and their resolutions are: 1. Channel stuffing (firms sell more stuff to customers than customers need)—this violates law. 2. Barter transactions (swaps of nearly identical services or products to create the illusion of revenue) 3. Mischaracterizing a transaction as arms-length (transfer of goods or other assets to a related party is not an arm’s length transaction.) 4. Pending approval of sales (firm delivers goods to customer before formal customer approval of transaction) 5. Gross sales vs commission (firm sells goods as agent for other firm and reports gross revenue rather than commission as revenue) 6. Consignment sales (Firm places goods with agent to sell. This is not a sale in itself.) 7. Failure to take delivery ( Products ordered but not yet received by buyer are not sold) 8. Nonrefundable fees (Fees paid up front for goods/services that are nonrefundable are not revenue until the goods/services are given to buyer.)
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An exception to revenue recognition occurs in firms that manufacture goods for specific customers over a long period of time (Long term sales contracts) (e.g. shopping mall, fleet of airplanes, etc.) These firms use PERCENTAGE OF COMPLETION revenue recognition. % completion is measured by cost incurred/total expected cost. Example:
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Module 5 notes - Acct 6015 Module 5 notes In this chapter...

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