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Chapter+6+with+answers - Chapter 6: Revenue Recognition...

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Chapter 6: Revenue Recognition Read: Chapter 6 In-class exercises: BE6-7, EX6-11, EX6-9, EX6-16, EX6-18 Practice exercises: EX6-7, BE6-11, P6-1, P6-2 1
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Understanding 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? These are normally specified in sales agreements What is being sold? What is being received? Sales transactions often involve transfer of goods, services, or both (known as deliverables) 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 Consideration 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 = Value of consideration 2
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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 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 3
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There are two main conceptual views on how to account for revenues/sales: Earnings approach Contract-based approach Earnings Approach Revenues are recognized when the following criteria are met: 1. Performance is achieved: a. risks and rewards transferred and/or earnings process substantially complete, and b. measurability reasonably assured 2. Collectibility is reasonably assured “Earnings process” is substantially complete. Operational functions firm that ADD VALUE in generation of revenue
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This note was uploaded on 12/12/2010 for the course ACTG 2P31 taught by Professor Pacharn,p during the Fall '10 term at Brock University, Canada.

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Chapter+6+with+answers - Chapter 6: Revenue Recognition...

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