ch18 - Chapter 18 Revenue Recognition Chapter 18: Key...

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Chapter 18 Revenue Recognition
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Chapter 18: Key Concepts Discuss key issues relating to revenue recognition. Review revenue recognition principle. Discuss SEC guidance on revenue recognition. Discuss acceptable departures from point of sale revenue recognition. Learn the accounting for the Percentage-of-Completion and Completed Contract Methods. Special accounting issues when there are losses. Revenue Recognition - IFRS and U.S. GAAP. Note: We will not discuss Installment Sales or Cost Recovery methods. 2 Accounting 301A-Eiler
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Revenue Recognition Big Issue: Timing of revenue recognition Income statement should report results of operations for only for the period of time specified in the report. Objective of revenue recognition criteria is to ensure proper cutoff. Accounting 301A-Eiler 3
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Revenue Recognition Principle Revenue should be reported when it is (1) earned and (2) realized or realizable. Earned: The earnings process is complete or substantially complete. Realized: There is reasonable certainty of collection of the asset to be received (usually cash). Realizable: Assets received can easily be converted into cash (or claims to cash). Accounting 301A-Eiler 4
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Revenue Recognition: SAB 101 SEC provides additional criteria for judging whether the realization principle is satisfied. Revenue is “earned and realized” when all of the following criteria are met: 1. Persuasive evidence of an exchange arrangement exists. 2. Delivery has occurred or services have been rendered. 3. The seller’s price to the buyer is fixed or determinable. 4. Collectability is reasonably assured. Accounting 301A-Eiler 5
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Revenue Recognition (cont.) Revenue is often recognized at the time the product or service is sold. In many cases, this is the earliest moment at which both conditions are satisfied. However, the time of the sale is not the sole criterion – the financial accounting rule is much more complicated and subtle. Accounting 301A-Eiler 6
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The Revenue Recognition Process Accounting 301A-Eiler 7 The Revenue Recognition Process Acquisition of Completion of Sale of good Cash Assets used in Production or service Collection production Time Long-term Natural resources Most retail Situations with construction (e.g. oil, mining) and manufacturing extreme industry industries uncertainty Agricultural regarding cash products collection Production Phase Receivable Holding Inventory Holding
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Revenue Recognition at the Point of Sale (Delivery) Problems implementing SFAC No. 5 can arise: Sales with Buyback Agreements: No revenue is recognized if there is a repurchase agreement in place that covers both the cost of the inventory and the holding costs. Sales with Right of Return:
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This note was uploaded on 11/08/2011 for the course ECON 102 taught by Professor Smith during the Spring '11 term at Saddleback.

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ch18 - Chapter 18 Revenue Recognition Chapter 18: Key...

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