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Chapter 5 - Chapter 5 Income Recognition and Profit...

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Chapter 5, Income Recognition and Profit Analysis Anthony Meder, Ph.D. October 4 & 6, 2011
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Revenue Recognition Realization Principle Earnings process complete (or virtually complete) Reasonably certain collectability SAB 101 (SEC wanted further clarification) Evidence of a sales agreement between parties Delivery has occurred or services rendered Price is fixed or readily determinable
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Recognition at the point of delivery The ‘usual’ method we think of Product or service delivered Collectability reasonably certain We recognize Revenue Accts. Rec 2,000 Sales Revenue 2,000 Cost of Goods Sold 1,600 Inventory 1,600 What if we should delay recognition?
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Recognizing after delivery What if collectability is NOT reasonably certain? Delivered, but collectability concerns An example is an installment sale… you can buy this vacuum for 36 payments. 3 years to pay 2 methods to deal with collectability concerns Installment method Cost Recovery method
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Installment Method Concerned about collectability Or, if it IS an installment sale (i.e. annual payments over 5 years).
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