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Unformatted text preview: Final Exam Review- Hitzig 1. Revenue Recognition: General: 25-1 The recognition of revenue and gains of an entity during a period involves consideration of the following two factors, with sometimes one and sometimes the other being the more important consideration: a. Being realized or realizable. Revenue and gains generally are not recognized until realized or realizable. Paragraph 83(a) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises , states that revenue and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. That paragraph states that revenue and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. b. Being earned . Paragraph 83(b) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises , states that revenue is not recognized until earned. That paragraph states that an entity's revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. That paragraph states that gains commonly result from transactions and other events that involve no earning process, and for recognizing gains, being earned is generally less significant than being realized or realizable. The staff believes that revenue generally is realized or realizable and earned when all of the following criteria are met: Persuasive evidence of an arrangement exists Delivery has occurred or services have been rendered The seller's price to the buyer is fixed or determinable Collectibility is reasonably assured. Reporting Revenue Gross as a Principal versus Net as an Agent: (WWW) Gross Principal Net Agent The entity is the primary Obligor in the Arrangement ( ex: right to approve customers) The entity has latitude in Establishing Price ( ex; right to approve the price the customers pay) The entity has discretion in supplier selection ( ex: Selects were with who to do business) The entity is involved in the determination of product or service specifications ( ex: using the suppliers product ) The entity has credit risk ( ex: share of all credits issued to customers service failures) The supplier has credit risk ( ex: responsibility to collect revenue, not the main but the partner) The entitys supplier is the primary obligor in the arrangement ( ex: partner responsible for the fulfillment of services) Recognizing Revenue as a single unit or as a separate unit: ( Lighthouse case) Revenue as a single unit ( jointly) Revenue separately-- The upfront fee and continuing performance obligation related to the services to be provided or...
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