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Handout 05 - INTRODUCTION TO FINANCIAL ACCOUNTING...

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Copyright © 2011 1 You may only share these materials with current term students. I NTRODUCTION TO F INANCIAL A CCOUNTING 33:010:272 S ECTIONS 08 & 09 |FALL 2011 P ROFESSOR J ULIAN Y EO Class Notes 5: Net Income and Revenue Recognition In this document, we examine the definition of net income, accounting criteria for revenue (and expense) recognition. Specifically, we study the followings: 1. What is Net Income? 2. Revenue Recognition under GAAP 3. Expense recognition under GAAP 4. How companies manipulate revenue recognition and revenue measurement Upon completion of this topic, you should be able to: Understand that in the long run, Total ∆cash = Total Net Income = Total Return Appreciate that accrual Net Income is measured independently of the timing of cash flows (as opposed to ∆cash) and relies on measures that we have a degree of certainty (as opposed to Return) Familiarize with GAAP Revenue Recognition Criteria: Earned, Realized/Realizable Understand implementation issues with revenue recognition criteria o Revenues are reported net of discounts, allowances and returns Trade/promotional coupons o Defer revenue recognition Activation/installation fees o Gross vs Net o Not always clear when we should recognize something as revenue Familiar with GAAP Expense Recognition o Product vs Period Costs Understand why firms have incentives to manipulate revenue recognition and revenue measurement.
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