Intermediate Accounting

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8 Revenue Recognition Overview Revenue recognition, on the surface, seems to be a straightforward topic, and so you may be wondering why an entire chapter is devoted to it. As mentioned in Chapter 6, revenue recognition, or rather improper revenue recognition in some instances, is one of the main methods of earnings management. While there are some basic guidelines for revenue recognition, there are also many kinds of transactions that don’t easily fall under these fundamental rules; there are fuzzy areas and exceptions for certain types of transactions. Typically revenue should be recognized when two criteria are met. The first is that payment has been received or is collectible. The second is that the earnings process needs to be substantially complete, which generally means that a product has been delivered or a service has been performed. SAB 101/104 provides additional guidance and specific examples related to the above two criteria. The SEC released these standards to combat specific revenue recognition abuses that had come to their attention. For companies in the construction industry, there are two permissible methods to recognizing revenue. The more common method is known as the percentage-of- completion method. Under this method, the company providing the construction recognizes revenue as they complete the work. When cash is received is not a factor. The other method is more conservative and is known as the completed-contract method. Revenue isn’t recognized until the contract is completed, as the name indicates, under this second method. Similar methods are available for long-term service contracts as there are for construction contracts. Under the typical revenue recognition system, payment needs to be realizable. What happens when the realizability is in question? Under this scenario, another method known as the installment sales method comes into play. In more extreme instances, cost recovery or a pure cash method can be the correct method to use in recognizing revenue.
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8-2 Chapter 8 Learning Objectives Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that this section of the chapter is second nature to you before you attempt the homework, a quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat sheet” to the basic concepts and principles that must be mastered. If after reading this section of the chapter you still don’t feel comfortable with all of the Learning Objectives covered, you will need to spend additional time and effort reviewing those concepts that you are struggling with. The following “Tips, Hints, and Things to Remember” are organized according to the Learning Objectives (LOs) in the chapter and should be gone over after reading each of the LOs in the textbook. Tips, Hints, and Things to Remember
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032459237X_174367 - 8 Revenue Recognition Overview Revenue...

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