Course Notes Chapter 18

Course Notes Chapter 18 - RevenueRecognition...

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Revenue Recognition Revenue Recognition Chapter 18
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The  revenue recognition principle  provides that (§605-10-25:1)  revenue is recognized: when it is  earned , and when it is  realized   or  realizable Revenue is  earned  when the earnings process is substantially  complete. Ask:  have the risks and rewards of ownership been transferred? Revenue is  realized  when goods and services are exchanged for cash  or claims to cash. Revenue is  realizable   when assets received are convertible into a  known amount of cash. Guidelines for Revenue Recognition Guidelines for Revenue Recognition
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Revenue Recognition Classified by Nature  Revenue Recognition Classified by Nature  of Transaction of Transaction
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Revenues from manufacturing and selling are commonly  recognized at  point of sale . Exceptions: 1. Sales with  buyback agreements 2. Sales when  right of return  exists (high rates that are not reliably estimable) 1. Trade loading  and  channel stuffing Here’s where the question on the risks and benefits of ownership is  useful Revenue Recognition at Point of Sale Revenue Recognition at Point of Sale
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Revenue may be  recognized before delivery  under certain  circumstances.  Long-term construction contracts are a  notable example Two methods are available: The  percentage-of-completion   method, and The  completed contract  method Revenue Recognition Before Delivery Revenue Recognition Before Delivery
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Long-Term Construction Accounting Methods 1)  Terms of contract must      be certain, enforceable. 2) Certainty of performance      by both parties 3) Estimates of completion     can be made reliably 1) To be used only when       the percentage method is       inapplicable [uncertain] 2) For short-term contracts Percentage-of-Completion Method Completed Contract Method Revenue Recognition Before Delivery Revenue Recognition Before Delivery
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          Costs incurred to date        =    Percent complete Most recent estimated total costs 1 1 Estimated total revenue  x  Percent complete                                         =   Revenue to be recognized to date 2 2 Total revenue to be recognized to date less  Revenue   recognized in PRIOR periods  =   Current period revenue 3 3 Current Period Revenue less  current costs =  Gross profit 4 4 Percentage-of-Completion: Steps Percentage-of-Completion: Steps
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Cost of construction:  Construction in process (CIP)  Materials, cash, payables, etc .
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This note was uploaded on 08/22/2011 for the course ACIS 3116 taught by Professor Staff during the Spring '11 term at Virginia Tech.

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Course Notes Chapter 18 - RevenueRecognition...

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