Lecture 5 Revenue Recognition

Lecture 5 Revenue Recognition - Lecture 5 Revenue...

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Click to edit Master subtitle style 9/13/11 Lecture 5 Revenue Recognition MGCR 211 – Fall 2008
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9/13/11 Overview Revenue Recognition l Principles & Interpretations Cash to Cash Cycle Percentage of Completion vs. Completed Contract Earnings Management of Revenues
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9/13/11 Revenue Recognition Principle Revenue can be recognized when: l The performance has been achieved Risks and rewards are transferred and/or the earnings process is substantially complete The amount earned is measurable l There is reasonable assurance of the collectability of the amount earned l Can estimate fairly all the future expenses
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9/13/11 Revenue Recognition Defines the timing of when revenues can be booked by the company and reflected in their income statements Revenue Recognition, depending on the company, can be highly complex. One of the grey areas of accounting where management can come to different conclusions that could be supported.
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9/13/11 Revenue Recognition is important Usually the largest amount on the income statement Investors are always concerned about profitability of the company Many indicators and ratios are tied to Net Income. The higher the revenues, the better the ratios will usually be Management can also have links to revenue recognition such as bonuses tied to company performance.
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9/13/11 Revenue Recognition – 2 main questions When should I record the revenue? (timing) What amount of revenue should I record? (measurement)
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9/13/11 Cash to Cash Cycle The revenue recognition principle oversees how and when the journal entries for the transactions that are part of the operating cycle must be recorded. Cash Acquisi tion of Invento ry Sales Deliver y of Produc Collecti on
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9/13/11 Revenue Recognition Have to consider all the criteria, in the context of the business in question before making any decision about the revenue recognition. In general, revenue is recognized when the product is delivered or when the service is rendered.
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9/13/11 Example 1 – When would you recognize revenue? Purchase place ticket in September for an upcoming trip in December. The Airline company charges you now. Ca sh In v Sal es De liv Col l Revenue can be recognized when: l The performance has been achieved Risks and rewards are transferred The amount earned is
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9/13/11 You purchase the software Microsoft office for your computer. Included with the software is a one year guarantee and on-line support. You pay for the software now. Ca sh In v Sal es De liv Col l Revenue can be recognized when: l The performance has been achieved Risks and rewards are Example 1 – When would you recognize revenue?
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9/13/11 A large public company purchases a custom made software license for all of their accounting functions.
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Lecture 5 Revenue Recognition - Lecture 5 Revenue...

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