ch10smoperational - Operating Activities-Revenue and...

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CHAPTER 10 Operating Activities--Revenue and Expense Recognition Answers to End-of-Chapter Assignments Questions Q1. Revenue Recognition Criteria. What two criteria determine the timing of revenue recognition? Answer. Revenue should be recognized when it is (1) realized or realizable and (2) earned. Q2. Revenue Realization. With respect to revenue recognition, what is meant by the term “realized”? How does “realizable” differ in meaning? Answer. Revenue is realized when a company has collected cash in return for selling a product (merchandising and manufacturing firms) or performing a service (service firms). If a firm has sold a product or performed a service in exchange for an asset about which any uncertainty of cash collection has been reduced to an acceptable level (e.g., accounts receivable from a steady customer that pays its bills on time), then the revenue is realizable . Q3. Revenue Recognition. How do firms earn revenue? Answer. Firms earn revenues by selling and delivering products and/or performing services. Revenues are deemed to be earned when a company has substantially performed all its obligations related to delivering the product or performing the service. Q4. Revenue Recognition. What is the general rule for the timing of revenue recognition? Answer. The general rule is that revenues are recognized when the product is delivered (merchandising and manufacturing firms) and/or the service is performed (service firms). Q5. Sales Returns. Normally, a sale subject to a sales return is recognized. What factors would cause sales subject to sales returns not to be recorded until the right of return expires? Answer. The text list six conditions that must be met in order for a sale subject to sales return to be recognized. If the (1) amount of sales returns cannot reasonably be estimated, then the sale should not be recognized until either the right of return expires or the amount to be returned can be reasonably estimated. If the sale is (2) contingent on resale, if the (3) seller has significant obligation to bring about resale, or if the (4) buyer’s obligation is changed in the event of theft, damage, etc., the sale should not be recorded until either the right of return expires or the amount to be returned can be reasonably estimated. The (5) buyer must have economic substance apart from the seller in order for the sale to be recognized. Finally, the (6) sales price must be fixed or determinable at the time of sale in order for the sale to be recognized. Q6. Revenue Recognition--When Right of Return Exists. How does a customer's right to return merchandise affect the timing of revenue recognition? 1
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ch10smoperational - Operating Activities-Revenue and...

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