Handout_05_(APSCW_-_F2009)

Handout_05_(APSCW_-_F2009) - FINANCIALACCOUNTING...

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BUSI W3013 Handout 05 | Page 1 F INANCIAL A CCOUNTING BUSI W3013 | F ALL 2009 H ANDOUT 05 PROFESSOR ANDREW SCHMIDT 1.0 Introduction ………………………………… 1 2.0 Revenue Recognition ………………………………… 2 3.0 Exceptions to Recognizing Revenue at Delivery ………………………………… 8 4.0 Problematic Revenue Recognition ………………………………… 23 5.0 Disclosure Requirements ………………………………… 24 6.0 Practice Exercises and Solutions ………………………………… 28 7.0 Problem Set 04 ………………………………… 32 8.0 Appendix ………………………………… 39 H ANDOUT O BJECTIVES : R EVENUE R ECOGNITION 1) Understand the application of the revenue recognition principle 2) Describe reasons for not recognizing revenue at the point-of-sale/delivery 3) Calculate revenues, expenses, and income using the percentage-of-completion (POC) method 4) Understand POC accounting and disclosures 5) Understand problematic revenue recognition practices 1.0. I NTRODUCTION Revenues are an inflow of assets or a settlement of liabilities during a period as a result of the delivery or production of goods, the rendering of services, or other recurring earnings activities. Revenue recognition refers to the amount and timing of revenue reported by a firm. Standard setters, accountants, and managers continuously struggle with the question of when revenue should be recognized. The magnitude of this struggle is reflected by the following statistic: Over 40% of SEC Enforcement Actions on accounting issues deal with revenue recognition.
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BUSI W3013 Handout 05 | Page 2 2.0. R EVENUE R ECOGNITION 2.1. Revenue Measurement Revenues are typically reported at the cash or cash-equivalent value (i.e., fair value) of the assets or services received (e.g., cash, notes receivable, other financial instruments, goods and services provided by customers in barter transactions). Revenues from credit sales where the asset recorded is accounts receivable (i.e., open account, as opposed to a note receivable) are reported nominally ignoring the time value of money. 1 2.1.1. Allowances and Discounts Revenues are reported on a net basis, that is, net of discounts for prompt payment (actual and expected), allowances for damaged or unsatisfactory merchandise (actual and expected), and returns (actual and expected). Actual discounts, allowances, and returns reduce the balance of AR (or cash – if the customers get a refund). Expected discounts, allowances, and returns increase either a contra asset to AR or a current liability (less common; appropriate when the customers have already paid). Sales returns have an additional effect on the financial statements (besides the reduction in revenue and AR or cash – if the customers get a refund): inventory is increased and COGS is reduced for the cost of inventory returned.
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Handout_05_(APSCW_-_F2009) - FINANCIALACCOUNTING...

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