Chapter 18 (ACCT-311) - CHAPTER REVIEW 1. One of the most...

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CHAPTER REVIEW 1. One of the most difficult issues facing accountants concerns the recognition of revenue by a business organization. Although general rules and guidelines exist, the significant variety of marketing methods for products and services make it difficult to apply the rules consistently in all situations. Chapter 18 is devoted to a discussion and illustration of revenue transactions that result from the sale of products and the rendering of services. Throughout the discussion, attention is focused on the theory behind the accounting methods used to recognize revenue. Revenue transactions that result from leasing and the sale of assets other than inventory are discussed in other sections of the text. Revenue Recognition 2. (S.O. 1) The revenue recognition principle provides that revenue is recognized when (1) it is realized or realizable, and (2) it is earned. Revenues are realized when goods and services are exchanged for cash or claims to cash (receivables). Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, that is, when the earnings process is complete or virtually complete. 3. The conceptual nature of revenue as well as the basis of accounting for revenue transactions are described in the following four statements. a. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers. b. Revenue from services rendered is recognized when services have been performed and are billable. c. Revenue from permitting others to use enterprise assets, such as interest, rent, and royalties, is recognized as time passes or as the assets are used. d. Revenue from disposing of assets other than products is recognized at the date of sale. Point of Sale 4. (S.O. 2) Sales transactions result in the exchange of products or services of an enterprise for other valuable assets, normally cash or a promise of cash in the future. Although most sales transactions are fundamentally similar, differences in the method or terms of sale lead to real differences in the transactions themselves and thus to differences in the appropriate accounting for them.
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5. The discussion of sales transactions in the chapter is primarily focused on product sales transactions. The coverage of product sales transactions is further divided into the following topics: (a) revenue recognition at point of sale (delivery), (b) revenue recognition before delivery, (c) revenue recognition after delivery, and (d) revenue recognition for special sales transactions (covered in Appendix 18-A ). The accounting principles and methods related to product sales transactions are fairly well developed in the accounting literature. 6.
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Chapter 18 (ACCT-311) - CHAPTER REVIEW 1. One of the most...

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