(4) Revenue Recognition

(4) Revenue Recognition - Chapter 4 Revenue Recognition:...

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Chapter 4 – Revenue Recognition: When losses occur, it’s important to evaluate both the size and cause of the loss We compare the quality of earnings by comparing the cash flow from operations with the net income o If these two amounts are moving together and if the cash flow amount is larger than the net income, we consider the net earnings to be of high quality Gross Margin = Sales – cost of goods sold Operating activities are the ones that generate the most revenue Operating activities almost always involve cash Cash-To-Cash Cycle: Business operation that involves an outflow of cash followed by an inflow of cash Cash: Initial amount of cash in a company comes from the original investment by the shareholders and from loans Selling Activity: Steps taken to sell the product (advertising, etc…) Delivery of Product: Once the sales contract has been agreed upon the product must be delivered to the customer Collection: Cash or A/R Price Allowance: If the goods get damaged in shipment, the buyer may ask for a price adjustment Warranty Service: Seller is responsible, to some extent, for product replacement or repair during this time If no repair is needed in an extended warranty then the company earns an additional revenue amount Summary of Cash-To-Cash Cycle: If cash inflows are smaller than outflows, the company may be unable to begin a new cycle If cash inflows are larger than outflows, the company could expand or pay
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This note was uploaded on 09/12/2011 for the course MGCR 211 taught by Professor La rocca during the Fall '08 term at McGill.

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(4) Revenue Recognition - Chapter 4 Revenue Recognition:...

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