Intermed acct spiceland ch5.txt

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isatonk
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Intermed acct spiceland ch5.txt
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2012-04-09 07:28:04
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UNT Intermediate Accounting Chapter5
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Questions relating to Chapter 5 of Intermediate Accounting by Spiceland
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  1. What is revenue?
    Inflow of assets or settlement of a liability from delivering goods and services
  2. Why is timing of revenue recognition important?
    Income statement should only report the results of operations for the time period specified => revenue recognition criteria ensure proper cutoff
  3. What is the realization principle?
    Revenue can be recognized when:

    1. earnings process is (virtually) complete

    2. collectability is reasonably certain
  4. What are the 4 additional criteria for judging whether the realization principle is satisfied?
    1. persuasive evidence of an arrangement exists

    2. delivery has occurred or services have been rendered

    3. price is fixed or determinable

    4. collectability is reasonably assured
  5. When has delivery occurred?
    When customer has

    - taken title

    - assumed risks and rewards of ownership (= delivered to and accepted by customer)
  6. When can revenue be recognized BEFORE delivery?
    When dependable estimates of progress of a long-term project are available

    Example: construction
  7. If revenue is recognized BEFORE delivery, which method is used and how does it work?
    percentage-of-completion method

    revenue is recognized each period during earnings process in proportion to its percentage of completion
  8. When is it appropriate to recognize revenue AFTER delivery and when is it recognized exactly?
    • 1. payments are significantly uncertain
    • => revenue is recognized when cash is collected

    • 2. reliable estimates of returns are unavailable
    • => revenue is recognized when event happens that reduces uncertainty

    • 3. sale on consignment
    • => when consignee sells to end consumer
  9. Which methods are used to recognize revenue when payments are significantly uncertain? How do they work roughly?
    • 1. Installment sales method:
    • Each payment is partial recovery of cost and partial gross profit, according to gp percentage at sale (gp / sales price)

    • 2. Cost recovery method:
    • Payments are cost recovery until cost paid in full, then they are gross profit

    Both methods are only used in unusual circumstances with exceptional uncertainty.
  10. What are the conditions to recognize revenue under IFRS (International Standards)?
    1. revenue and costs of transaction can be measured reliably

    2. collectability is certain

    • 3. (goods) buyer has risks and rewards of ownership and effectively manages or controls goods;
    • (services) stage of completion can be measured reliably
  11. What are the journal entries to record revenue upon delivery?
    • (debit) Acc. Rec./Cash
    • (credit) Revenue

    • (debit) Cogs
    • (credit) Inventory
  12. How is gross profit calculated when revenue is recognized upon delivery?
    gp = revenue - cogs
  13. How is service revenue recognized?
    1. as soon as activity is performed (taxi service)

    2. over time, in proportion to amount of service performed (gym membership/season pass)
  14. What are the journal entries for installment sales and their cash collection?
    • (debit) construction in progress (gross profit)
    • (debit) cost of construction

    • (credit) revenue from long-term contracts
    • [(credit) construction in progress (loss)]
  15. How are bad debts dealt with when using the installment sales method?
    There is no special allowance, but if cash is never collected, deferred gp never gets included in income.

    • If the seller repossesses, then:
    • (debit) Repossessed inventory (fair value)
    • (debit) Deferred gp
    • [(debit) Loss on repossession (if fair value is less than net receivable)]
    • (credit) Installment rec.
  16. What are the journal entries for the cost recovery method and its cash collection?
    • Sale:
    • (debit) Installments rec. (sales price)
    • (credit) Inventory (cogs)
    • (credit) Deferred gp (sales - cogs)

    • Collection:
    • (debit) Cash (full payment)
    • (credit) Installment rec. (full pmt)
    • Once cost is recovered, then additional entry:
    • (debit) Deferred gp (part of pmt that is gp)
    • (credit) Realized gp (part of pmt that is gp)
  17. What changes in revenue recognition if the right to return the product exists?
    Gp is deffered to the point at which return can be estimated reliably or right of return no longer exists (based on sales agreement or past experience)
  18. When is revenue of a consignment sale recognized?
    As soon as consignee sells good to end consumer.
  19. What is the completed contract method of revenue recognition and what is the problem with this method?
    - when a long-term project is finished

    • - all revenues, expenses, and resulting income are recognized in the period in which the project is virtually complete
    • => income statements do not fairly report each period's accomplishments, much of earnings process is far away from point of delivery
  20. What is the percentage of completion method for revenue recognition and how does it compute cost, revenue, and gp?
    • - revenues and expenses are allocated to each period
    • - future costs are estimated

    • Cost calculation:
    • Actual costs this period
    • + actual cost previous periods
    • = cumulative actual costs
    • + estimated additional costs to complete
    • = total costs

    • Revenue calculation:
    • Price per agreement x percentage of completion

    • GP calculation:
    • Gp this period = (total estimated gp x % of completion) - gp prior periods
    • Total est. gp = total est. revenue - total est. cost
  21. Explain how you arrive at the current period�s gp under the percentage-of-completion method of revenue recognition.
    Contract price

    • - est total cost
    • [act. cost this period
    • + act. cost prior periods
    • = cumulative act. costs so far
    • + est. addtl. costs to complete
    • = est. total cost]

    • = est. total gp
    • x percentage of completion (act. cost so far/est tot cost)

    • = gp to date
    • - gp recognized previously

    = gp this period
  22. Explain how you arrive at the current period's revenue under the percentage-of-completion method of revenue recognition.
    • revenue recognized to date (tot. rev. x % of completion)
    • - revenue recog. previously

    = revenue this period
  23. When losses recognized under the percentage-of-completion method?
    losses are recognized in the period they occur
  24. What are the journal entries to record gp, cost, and revenue under the percentage-of-completion method?
    • (debit) construction in progress (gross profit)
    • (debit) cost of construction

    • (credit) revenue from long-term contracts
    • [(credit) construction in progress (loss)]
  25. What is the account in which costs of construction are recorded?
    construction in progress (asset account equivalent to WIP)
  26. When losses recognized under the completed contract method? How is this done and why?
    • losses are recognized in the period they occur by decreasing construction in progress account:
    • (debit) loss from long-term contracts
    • (credit) construction in progress

    to not overstate expected realizable profit (equivalent to lower of cost or market)
  27. How is decided when to use percentage-of-completion or completed contract method?
    GAAP requires percentage-of-completion, unless reliable estimates of revenues, expenses, and progress toward completion cannot be made.
  28. What are the differences between GAAP and IFRS when in regards to revenue recognition of long-term contracts?
    IFRS requires the use of cost recovery method if reliable estimates of revenues, expenses, and progress toward completion cannot be made. Costs are expensed when incurred and an offsetting amount of revenue is recognized ("zero-profit method")
  29. How is revenue recognized under multiple-deliverable arrangements (one contract, several services/goods to be performed/delivered)?
    according to the separate parts

    • meaning:
    • when
    • - goods are delivered
    • - services performed
    • - partial if long-term

    • example: software
    • - sale of cd [at point of delivery]
    • - updates [future point of delivery]
    • - software support [over time]
  30. How is revenue recognized on franchise sales?
    initial franchise fee: when substantial performance of initial services of franchisor

    continuing franchise fee: over time
  31. What are the journal entries for initial franchise fees?
    • advance payment:
    • (debit) cash
    • (debit) note receivable
    • (credit) unearned franchise fee revenue

    • revenue recognition:
    • (debit) unearned franchise fee revenue
    • (credit) franchise fee revenue
  32. How are continuing franchise fees recorded?
    as service revenue
  33. What is the asset turnover and how is it calculated?
    measure of asset efficiency => How efficiently does the company utilize its assets?

    asset turnover = net sales / avg total assets

    avg total assets = (beginning total assets + ending total assets) / 2
  34. What is the receivables turnover and how is it calculated?
    measure of efficiency in collection receivables => How many times does the company collect the avg balance of accts. rec.?

    rec. turnover = net sales / avg accts. rec. (net)

    avg accts. rec (net) = (beginning net accts. rec. + ending net accts. rec) / 2

    net = net of allow. for uncoll. accts.
  35. What is the average collection period and how is it calculated?
    measure of days avg accts. rec. is outstanding => How fast does the company collect their accts. rec. on average?

    avg. coll. period = 365 / rec. turnover
  36. What is the inventory turnover and how is it calculated?
    measure of speed inventory is sold => How fast does the company sell its inventory?

    inventory turnover = cogs / avg inventory

    avg inventory = (beginning inventory + ending inventory) / 2
  37. What is the average days in inventory and how is it calculated?
    number of days inventory is on hand => How many days does the company have its inventory?

    avg days in inventory = 365 / inventory turnover
  38. What is the profit margin on sales and how is it calculated?
    indicates the percentage of revenue that is available to cover expenses

    profit margin on sales = net income / net sales
  39. What is the return on assets and how is it calculated?
    measures percentage of avg total assets available to generate income

    ROA = net income / avg. total assets

    ROA = profit margin x asset turnover
  40. What is the return on shareholders' equity and how is it calculated?
    amount of profit generated from resources provided by shareholders

    ROSE = net income / avg. se
  41. What is the DuPond framework and how is it calculated?
    breaks return on equity into profitability, activity, and financial leverage

    ROE = profit margin x asset turnover x equity multiplier

    ROE = return on assets x equity multiplier

    equity multiplier = avg. total assets / avg total equity
  42. What is interim reporting and what are its (dis)advantages?
    financial statements covering a period less than one year

    • advantages:
    • + enhance timeliness of financial information
    • + additional insight of seasonality

    • disadvantages:
    • - relative unreliable (fixed costs occur one time, but bring benefit for longer)
    • - intensified effect of major events
    • - different tax rates

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