AFM291-ch06

AFM291-ch06 - RevenueRecognition Chapter 6 AFM 291 chapter...

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AFM 291 chapter 6 1     Chapter 6 Chapter 6                               Revenue Recognition Revenue Recognition    
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AFM 291 chapter 6 2 Understanding Sales Transactions Accounting for revenues is often very complex Much of complexity is caused by the structure of the sales transactions To properly account for sales transactions, accountants must understand the business of the entity and the nature of the transaction Key questions for understanding the sales transactions from a business perspective are: What is being given up? What is being received? Normally specified in sales agreements
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AFM 291 chapter 6 3 What is being sold? Sales transactions often involve transfer of goods, services, or both (known as deliverables ) Accounting is different under each situation Sale of goods: physical assets with finite point when control transfers to buyer (generally with transfer of legal title and possession ) Sale of services: legal title and possession irrelevant Sale of goods and/or services combinations: complexity in measuring each component of bundled sales or multiple deliverables
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AFM 291 chapter 6 4 What is being received? Consideration being received for goods and/or services sold is either: Cash or cash-like (monetary) Non-monetary (another good/service, also known as barter) Generally assume that the transaction is at arm’s length (between unrelated parties) such that Value of  deliverables  sold Value of  consideration  received =
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AFM 291 chapter 6 5 Concessionary Terms It is critical to understand if sales are done under normal terms , or are special/ unusual and contain concessionary terms such as: Lenient return/payment policy More accommodating credit policy “Bill and hold” transactions Inclusion of “extras” Concessionary terms may create additional obligations , or may indicate that control has not passed to the buyer
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AFM 291 chapter 6 6 Legalities Rights and obligations of sales transactions are described and governed by law Contract law is most relevant as each sales transaction represents a contract with the customer Contract creates enforceable obligations and establishes the terms of the deal Sales contract generally determines the point when legal title and possession of goods sold pass on to the customer: FOB shipping point FOB destination Implicit obligations not specifically outlined in the sales contract (i.e. constructive obligation ) may also be enforced under common or other law
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AFM 291 chapter 6 7 Sales Transactions Revenue/sales is described as: inflow of economic benefits (e.g. Cash, receivables, etc) arising from ordinary activities There are two main conceptual views on how to account for revenues/sales: Earnings approach Contract-based approach
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AFM 291 chapter 6 8 Earnings Approach Revenues are recognized when the following criteria are met:
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AFM291-ch06 - RevenueRecognition Chapter 6 AFM 291 chapter...

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