ch #6 - RSM221Intermediate FinancialAccounting 9...

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RSM221 – Intermediate  Financial Accounting 9  Edition, Volume 2, Chapter 6
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Understanding the Nature of Sales  Transactions from a Business  Perspective Revenue Recognition Based on RCMP (all four must apply) R = Risks and Rewards have been transferred  from buyer to seller C = Collectability of the receivable is not at risk M = Measurement – units, kgs, etc. P = Price – has a price been considered for the  exchange of goods and services 2
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Concessionary (Abnormal) Terms –  Is this a Special Deal? Concessionary terms may create additional  obligations or may reflect the fact that the  risks and rewards or control have not yet  passed to the customer.  Examples include: The entity agrees to a more lenient return or  payment policy (or loosens credit policy) The entity transfers legal title but allows the  customer to take delivery at a later date Extended trial periods are granted The seller continues to have some involvement,  including a guarantee of resale (or permission to  return) or guarantee of profit 3
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So 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 4
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Legalities When an entity sells something, both the  entity and the customer enter into a contract From a revenue recognition perspective, the  contract establishes the point in time when  legal title passes FOB Shipping Point  – means title passes at  the point of shipment (quicker revenue  recognition) FOB Destination Point  – means title passes  when the asset reaches the customer  (prolonged revenue recognition) 5
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Legalities (cont) constructive obligation  is an obligation  that is created through past practice. Example: A company has a 30-day return policy  however it has customarily accepted all  returns for any reason even after the 30-day  period 6
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7 Revenue Recognition Revenue Recognition Understanding the Understanding the nature of sales nature of sales transactions from transactions from a business a business perspective perspective •Economics of business transactions Legalities Accounting – Accounting – presentation and presentation and disclosure disclosure •Revenues versus gains Net income versus other comprehensive
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This note was uploaded on 01/17/2011 for the course RSM 221 taught by Professor Scott during the Summer '09 term at University of Toronto- Toronto.

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ch #6 - RSM221Intermediate FinancialAccounting 9...

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