Accounting 312 ch 7 - Accounting 312 Chapter 7 Revenue Recognition-revenue recognition has been the largest single course of public company

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Accounting 312 Chapter 7- Revenue Recognition -revenue recognition has been the largest single course of public company restatements over the past decade 1. restatements for improper rev recognition result in larger drops in market capitalization 2. rev problems caused eight of the top ten market value losses 3. leading three companies lost 20 bill in market value in three days following disclosure of rev recognition problems Guidelines for Revenue Recognition -revenue recognition principle provides that companies should recognize revenue when it is realized or realizable and when it is earned *revenues are realized when a co exchanges goods or services for cash or claims to cash *revenues are realized when assets received in exchange are readily convertible to known amts of cash or claims to cash *revenues are earned when a co has substantially accomplished what it must do to be entitled to the benefits represented by the revenues- when the earnings process is complete or virtually complete -four revenue transactions are recognized in accordance with this principle: 1. companies recognize revenue from selling products at the date of sale- date is interpreted to mean the date of delivery 2. recognize revenue from services rendered when services have been performed and are billed 3. companies recognize revenue from permitting others to use enterprise assets, such as interest, rent and royalties, as time passes or as the assets are used 4. disposing of assets other than products at the date of sale Departure from the Sale Basis -desire to recognize earlier than the time of sale the effect of earning activities *appropriate if there is a high degree of certainty about the amt of revenue earned -desire to delay recognition of revenue beyond the time of sale *appropriate if the degree of uncertainty concerning the amt of either rev or costs is sufficiently high or if the sale does not represent substantial completion of the earnings process -sales transactions: selling products and rendering services Revenue Recognition at Point of Sale (Delivery) -Sales with Buyback Agreements ~if a co sells a product in one period and agrees to buy it back in the next accounting period, has the company sold the product? *legal title has transferred in this situation, but the econ substance of the transaction is that the seller retains the risks of ownership so the profession has curtailed recognition of revenue using this practice *NO SALE -Sales when Right of Return Exists ~certain companies experience such a high rate of returns that they find it necessary to postpone reporting sales until the return privilege has expired ~examples: publishers, perishable foods
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This note was uploaded on 01/23/2011 for the course ACCOUNTING acc312 taught by Professor Halwhite during the Fall '10 term at University of Michigan.

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Accounting 312 ch 7 - Accounting 312 Chapter 7 Revenue Recognition-revenue recognition has been the largest single course of public company

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