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Revenue Recognition I

Revenue Recognition I - NBA 500 Intermediate Accounting...

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Unformatted text preview: NBA 500: Intermediate Accounting Mark W. Nelson REVENUE RECOGNITION I: ACCOUNTING METHODS 1. Overview of general revenue recognition issues: Revenue recognition can occur at delivery, deferred until after delivery, or allowed before delivery. Over- riding principle: Revenue is generally recognized as soon as it is viewed as earned and realizable, and can be estimated dependably, but specifics vary by industry and company. 2. Specific issues discussed: a. Unit of account and multiple-deliverable contracts: the basic approach is to identify separable parts of the contract and allocate contract price to them based on relative fair value (actual or estimated), and then recognize revenue for each part when appropriate to do so. b. Situations that might require deferral: difficult to estimate bad debts, right of return, bill and hold arrangements. In each case, basic structure of entries is the same — we recognize a liability, deferred revenue, until allowed to recognize revenue. c. Gross v. net presentation: depends on weighting of indicators as to whether company is a principle vendor or an agent facilitating two other parties’ transaction. (1. Mechanics of the percentage-of-completion method and the completed contract method. Both methods set up a contra-inventory account (Billings) whenever they set up an accounts receivable to avoid the double accounting that would occur from simultaneously recognizing on the balance sheet both the physical asset (inventory) and the financial asset (A/R or cash) associated with a contract. The only difference between the methods is when revenue, COGS and therefore gross profit are realized. For percentage-of—completion method, can have to recognize losses late in contract if early gross-profit estimates were too optimistic. For both methods, need to recognize overall contract losses in period in which the loss becomes known. 3. Note: you are not responsible for the mechanics of the installment method or cost recovery method. Those are methods that are used to defer revenue recognition until cash is collected. They seldom are used in practice. Therefore, skip guestions AA and A.5 of the Energy Conversion Devices case assigned for next class. ...
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