Chapter 4 Revenue Recognition

Chapter 4 Revenue Recognition - Cash collection is...

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Chapter 4 Revenue Recognition 4.1 Cash based accounting vs. actual based accounting 4.2 Revenue recognition method Revenue: increase in ret earnings from ongoing operations Gain: increase in ret earnings resulting from peripheral transactions (selling a LTA for higher than book value) Expenses: decrease in ret earnings from ongoing operations Loss: decrease in ret earnings from peripheral transactions (selling a LTA for lower than book value) Income= Revenue+Gains-Expenses-Losses Accounting Systems 1. Cash based: revenues are recognized when cash is received, expenses are recognized when cash is paid. Revenue=cash in, expenses=cash out 2. Accrual Based: (assumed) revenues are recognized when earned expenses are recognized when incurred , regardless of cash collections or payments. Small firms shouldn’t use big firms should use. Revenue is considered to be earned when: Earnings process is complete or nearly complete goods are delivered and services are performed AND Amount can be measured AND
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Unformatted text preview: Cash collection is reasonably assured Exceptions: Mining: revenue is recognized when extraction is complete prices are determined by market. When Cash is not Reasonably Assured: (multi year estate transactions) instalment method: revenue is recognized when received 3. Multi Year Projects: (construction) choice: a) Completed Contact Method: revenues and expenses are recognized only when the project is completed b) Percentage of Completion Method: revenue is recognized based on the amount % of work completed. E.g. Architectures Inc agrees to construct a building for 200 mil. Estimated cost of the project are 56 in year 1, 64 year 2, 40 mil year 3. Completed Contract Y1 Y2 Y3 Revenue 200 200 Cost 160 160 Income 40 40 % of completion Y1 Y2 Y3 Revenue 200 200*.35=70 200*.40=80 200*.5=50 Cost 160 56 64 40 Percentage cost 56/160 64/160 40/160 Income 40 14 16 10 Exemption: if a loss is expected on the project, the loss must be recognized a.s.a.p...
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Chapter 4 Revenue Recognition - Cash collection is...

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