251Ch4NotesSend (1)

251Ch4NotesSend (1) - BUS 251 D1 & E1 (12-1) Lecture...

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Bus 251 Ch.4 1 Lecture Notes Anne Macdonald Chapter 4 Revenue Recognition 1
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Bus 251 Ch.4 2 Revenue Recognition In Ch.3 we used the accrual basis to record revenue: DR Accounts receivable (A ↑) CR Revenue (SE ↑) BUT, WHEN should this entry be recorded? This is the Revenue Recognition issue.
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Bus 251 Ch.4 3 Feadship www.feadship.nl ‘What I did on my summer vacation’ (2008) OR An Example of Revenue Recognition on a Long-Term Project
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Bus 251 Ch.4 4 Feadship A joint venture between 3 Dutch shipbuilding companies. Began operations in 1949. Designs and builds luxury custom yachts. Built to owners’ specifications Features have included glass elevators, and a helicopter pad hidden below the front deck Over 200 ships currently on the seas. Largest yacht: Length 282 feet, width 39 feet, speed 30+ knots, range 6,500 nautical miles.
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Bus 251 Ch.4 5 Feadship
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Bus 251 Ch.4 6 Feadship
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Bus 251 Ch.4 7 Feadship
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Bus 251 Ch.4 8 Feadship Number of ships completed and launched in: 2006: 2 ships 2005: 2 ships 2004: 4 ships 2003: 4 ships The time to build a ship can be > one year  A REVENUE RECOGNITION issue
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Bus 251 Ch.4 9 Feadship E.g. Construction starts on a yacht on November 1st, 2010, and the ship is to be completed 18 months later at the end of April 2012. Total price quote for the customer? 36 million euros Accounting Question: In what year (or years) should REVENUE be recorded?
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Bus 251 Ch.4 10 Feadship Possible alternatives for Revenue Recognition? 2010 (2 months) 2011 (12 months) 2012 (4 months) TOTAL When the customer signs a purchase contract? $36 m Evenly over the 18 months (i.e. $2m per month)? $36 m When the project is finished? $36 m Based on some measure of ‘work done’? Will depend on the measure chosen – need to estimate the % of work completed in each year.
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Bus 251 Ch.4 11 Feadship Alternatives for measure- ment of ‘work done’ (i.e. the last option on prior slide)? 2010 (2 months) 2011 (12 months) 2012 (4 months) TOTAL % of labour hours incurred (out of estimated total labour hours for the project) (20%) $7.2m (65%) $23.4m (15%) $5.4m (100%) $36m % of tonnes of steel used (out of estimated total tonnes of steel for the project) (50%) $18.0m (35%) $12.6m (15%) $5.4m (100%) $36m Any other measure of ‘work done’ …. $36 m Allocations assumed in this example – for illustrative purposes.
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Bus 251 Ch.4 12 REVENUE RECOGNITION In an accrual accounting system, the exchange of cash may not take place at the same time as when the revenue is earned. Cash-to-Cash Cycle CASH  and INVENTORY  (Purchase of inventory) INVENTORY & COGS expense↑ and A/R  & Revenue ↑ (Sale of inventory) A/R  and CASH  (Collection of A/R)
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If you ran Feadship and were building a €36 million yacht for a client, when would you want the customer to pay?
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This note was uploaded on 02/18/2012 for the course BUSE 237 taught by Professor Sf during the Spring '12 term at Simon Fraser.

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251Ch4NotesSend (1) - BUS 251 D1 & E1 (12-1) Lecture...

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