Chapter_6 - Chapter 6 Revenue Recognition 1 Revenue...

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1 Chapter 6 Revenue Recognition
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2 Revenue Recognition Criteria Revenue is recognized when the following criteria are met: 1. Performance is achieved Risks and rewards are transferred and/or earnings process is substantially complete Measurability is reasonably assured 2. Collectibility is reasonably assured
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3 Revenue Recognition Criteria (cont’d) EIC 141 clarifies the meaning of performance: 1. Persuasive evidence of an arrangement exists Customary business practice Any side arrangements with customer The economic substance of the transaction (e.g. consignment sales) 2. Delivery has occurred, or service rendered 3. Seller’s price is fixed and determinable
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4 Revenue Recognition Criteria: Earnings Process What is the earnings process? Actions taken that add value to a product or service Discrete earnings process vs. Continuous earnings process Discrete : one main act or critical event that signals substantial completion e.g., the point of delivery goods to customers Continuous : involving numerous significant events or spanning more than one years e.g., construction contracts
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5 Discrete Earnings Process The point of delivery goods to customers is usually when risks and rewards of ownership pass from the seller to the customer. Two criteria to determine whether risks and reward of ownership has passed to another party: Who has possession of the goods? Who has legal title? e.g., F.O.B shipping point vs. F.O.B destination
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6 Discrete Earnings Process (cont’d) Special situations: Sales with buyback Bill and hold transactions Transactions with customer acceptance provisions Disposition of assets other than inventory Consignment sales Non-refundable fees Continuing managerial involvement Completion of production
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7 Consignment Sales Usually for the purpose of developing new market Not possess goods after delivered out Always has legal title (i.e., risks and rewards) of the goods Record goods as “Inventory on Consignment” on B/S Act as an agent and earn commission fees Possess goods after delivered in No legal title (i.e., r isks and rewards) o f the goods Not record goods on consignee’s books Consignor Consignee
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8 Goods shipped to consignee Inventory on Consignment $$$ Finished Goods Inventory $$$ Payment of freight costs Inventory on Consignment $$$ Cash $$$ Receive notification of sale from consignee Accounts Receivable $$$ Commission Expenses $$$ Revenue $$$ Receipt of cash from sale Cash $$$ Accounts Receivable $$$ Cost of Goods Sold $$$ Inventory on Consignment $$$ No Entry No Entry Notification/Payment of Sale to consigner Cash $$$ Payable to Consignor $$$ Payable to Consignor $$$ Commission Revenue $$$ Cash $$$ Consignor’s Books Consignee’s Books Consignment Sales (cont’d)
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This note was uploaded on 03/15/2010 for the course BUSINESS MGT200 taught by Professor Manjuris during the Spring '08 term at Ryerson.

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Chapter_6 - Chapter 6 Revenue Recognition 1 Revenue...

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