Revenue Recognition and Income

Revenue Recognition and Income - Revenue Recognition and...

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Revenue Recognition and Income
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Operating and Non-Operating Components of Income
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Revenue Recognition Criteria Revenue recognition criteria 1. realized or realizable , and 2. earned Realized or realizable means that the seller’s net assets (assets less liabilities) increase. Earned means that the seller has performed its duties under the terms of the sales agreement.
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Evidence Suggesting Revenue Should Not Be Recognized Rights of return exist – customer can return product for reasons other than basic defects or warranty (e.g., Hyundai Assurance program) Consignment sales – seller retains possession of product until it is resold Contingency sales – sales are contingent on product performance or further approvals by customer (e.g., real estate)
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Percentage-of-Completion The percentage-of-completion recognizes revenue by the proportion of costs incurred to date compared with total estimated costs. Assume that Bayer Construction signs a $10 million contract to construct a building. Abbott estimates construction will take two years and will cost $7,500,000. This means the contract yields an expected gross profit of $2,500,000 over two years. The following table summarizes construction costs incurred each year and the revenue Bayer recognizes.
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Percentage-of-Completion Revenue recognition policies for these types of contracts are disclosed in a manner typical to the following from the 2007 10-K report footnotes of Raytheon Company : “We generally use the cost-to-cost measure of progress for all of our long-term contracts… Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred-to-date to the total estimated costs at completion of the contract. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs. Revenues, including estimated earned fees or profits, are recorded as costs are incurred. Due to the nature of the work required to be performed on many of our contracts, the estimation of total revenue and cost at completion is complex and subject to many variables.”
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Risks of Percentage-of-Completion The percentage-of-completion method of revenue recognition requires an estimate of total costs.
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This note was uploaded on 11/21/2011 for the course BMGT 313F taught by Professor Seybert during the Fall '11 term at Maryland.

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Revenue Recognition and Income - Revenue Recognition and...

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