Ch5Final_Presentation_%5b1%5d2

Ch5Final_Presentation_%5b1%5d2 - Chapter 5 I ncome M easur...

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Unformatted text preview: Chapter 5 I ncome M easur ement and Pr ofitability Analysis REVENUE RECOGNI TI ON ABUSI VE REPORTI NG PRACTI CES I n 2002, the GAO (now Government Accountability Office--2004) reported that: 38% of announced restatements between 1997 and 2002 involved revenue recognition problems. About 50% of the SECs enforcement cases relate to revenue recognition Over 50% of market losses attributable to faulty revenue recognition SEC Staff Accounting Bulletins No. 101 and No. 104 Issued to crackdown on earnings management. Provides additional guidance to determine if the realization principle is satisfied: 1. Persuasive evidence of a sales arrangement exists. 2. Delivery has occurred or services have been performed. 3. The sellers price to the buyer is fixed or determinable. 4. Collectibility is reasonably assured. Revenue Recognition: Realization Pr inciple Record revenue when: AND There are no important uncertainties about the collectibility of the asset to be received (usually cash). The earnings process is complete or virtually complete = Sale Q1 Revenue recognition What are the two general criteria that must be satisfied before a company can recognize revenue? 1.The earnings process is judged to be complete or virtually complete. 2. There is reasonable certainty as to the collectibility of the asset to be received (usually cash). At Production At Delivery Cash Collection Sales Some Sales when right of return exists Completed contract (long term construction) Installment-sales method Cost-recovery method Percentage-of- completion method (long term construction contracts) Production (minerals, gold; food, corn ---futures market) REVENUE RECOGNI TI ON- ALTERNATI VE TI M I NG Q2 Point of Sale vs. Production Explain why, in most cases, a seller recognizes revenue when it delivers its product rather than when it produces the product. Uncertainties, about whether sale will occur, price at which sale will occur, collectibilty of account, etc., therefore delay until delivery FASBs Concepts Statement N o. 5 , companies usually meet the two conditions for recognizing revenue by the time they deliver products or render services to customers BUT there are: I mplementation problems, Sales with right of return (Revenue may be recognized at point of saleSFAS 48) Sales with Buyback Agreements (No revenue at delivery) Channel Stuffing (No revenue at delivery) Recognition at Deliver y of Goods or Pr oviding Ser vices Point of Sale FOB Shipping Point Title passes when the goods leave the seller Buyer assumes cost and responsibility for goods in transit FOB Destination Point Title passes when goods arrive at customer location Seller assumes cost and responsibility for goods in transit Significant Uncer tainty of Collectibility 1. Installment Sales Method 2. Cost Recovery Method When uncertainties about collectibility exist, revenue recognition is delayed. I nstallment Sales M ethod Sale and cost of sale recording...
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Ch5Final_Presentation_%5b1%5d2 - Chapter 5 I ncome M easur...

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