ACC327_CH18_Notes

ACC327_CH18_Notes - Chapter 18 Revenue Recognition 1 The...

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Chapter 18 Revenue Recognition 1. The general rule for recognizing revenue is the "revenue recognition principle". A. Revenue recognition principle - revenue is recognized when it is (1) realized or realizable and (2) earned. 1. Realized means goods or services have been exchanged for cash or claims to cash (i.e., receivables). Realizable means assets received in exchange are convertible to known amounts of cash. 2. Earned means the earnings process is virtually complete (i.e., the seller has no significant services left to perform). 3. In general, the above two requirements are met and revenue is recognized when the product is sold (i.e., delivered to the customer) or the service has been performed. 2. In many cases the revenue recognition principle as described above is easy to apply; however, it is sometimes difficult to apply because of the special terms of some sales transactions. These special sale transactions will be examined from the standpoint of when the revenue is recognized as follows: A. Revenue recognized at the point of sale (delivery) B. Revenue recognized before delivery. C. Revenue recognized after delivery. 3. Revenue recognition at point of sale (special circumstances) A. Sales with buyback agreements - involve the following two transactions Receives immediate cash from the sale. Pays for it over a period of time 1. The FASB concluded that, for the seller, a. No sale or reduction in inventory should be recorded, and
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b. the transaction should be recorded simply as a borrowing of cash with a corresponding liability. B. Sales with right of return. 1. Most products sold carry a right of return. The majority of sales present no special problems because the returns are minimal and can be adequately accounted for. 2. For some firms, however, the amount of returns may be so substantial that perhaps revenue should not be recognized at the time of sale because of the uncertainty surrounding the amount of returns. a. When the seller is exposed to significant risks of return, revenue may be recognized at the point of sale only if all factors identified on page 936 are met. 1. If these 6 conditions are not met at the time of sale, revenue will be recognized either when the return privilege has expired, or when the 6 conditions are substantially met.
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C. Channel stuffing - Occurs when the wholesaler or manufacturer either offers large discounts or forces the retailer or distributor to buy more inventory than needed. 1. The results are (1) wholesaler or manufacturer shows high revenue
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ACC327_CH18_Notes - Chapter 18 Revenue Recognition 1 The...

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