What is the core principle of the revenue standard, including the depiction of the transfer of promised goods or services? Recognize revenue only when cash is received from the customer Recognize revenue to depict the transfer of promised goods or services to the customers in any amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Recognize revenue based on the cost incurred to deliver the goods or services Recognize revenue when the contract is signed, regardless of delivery

Recognize revenue to depict the transfer of promised goods or services to the customers in any amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services

What describes the condition(s) that must be present for the recognition of revenue from a contract with a customer? The customer must have paid in full The goods must be delivered to the customer One of the contract's performance obligations must be fulfilled The contract must be legally binding

One of the contract's performance obligations must be fulfilled

What are the 5 steps to recognize revenue, including identifying contracts and performance obligations? 1. Draft the contract 2. Agree on terms 3. Deliver goods 4. Invoice the customer 5. Receive payment 1. Sign the contract 2. Deliver the goods 3. Receive payment 4. Record the transaction 5. Close the contract 1. Identify the customer 2. Determine the price 3. Deliver the goods 4. Receive payment 5. Record revenue 1. Identify the contract with the customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations 5. Recognize revenue when or as the entity satisfies a performance obligation

1. Identify the contract with the customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations 5. Recognize revenue when or as the entity satisfies a performance obligation

Explain step 1 (identify the contract with a customer) in the revenue recognition process. The contract must include a detailed list of goods and services Existence of a contract may involve but does not require a legal document; based on normal business practices, might be an oral agreement or legal document; the contract should create enforceable rights and obligations The contract must be signed by both parties and notarized The contract must be registered with a government agency

Existence of a contract may involve but does not require a legal document; based on normal business practices, might be an oral agreement or legal document; the contract should create enforceable rights and obligations

Explain step 2 (Identify the performance obligations in the contract) in the revenue recognition process. The performance obligations must be listed in the contract The performance obligations are determined by the customer The 'deliverables' that the company agrees to provide to the customer; each performance obligation should be distinct (capable of providing benefits on its own or in combination with readily available resources); separately purchased 3-year extended warranty on a car is a distinct obligation The performance obligations are based on industry standards

The 'deliverables' that the company agrees to provide to the customer; each performance obligation should be distinct (capable of providing benefits on its own or in combination with readily available resources); separately purchased 3-year extended warranty on a car is a distinct obligation

Explain step 3 (determine the transaction price) in the revenue recognition process. The transaction price is determined by market conditions The transaction price is the list price of the goods or services The transaction price is the amount paid by the customer The amount to which the seller expects to be entitled to receive when the contract performance obligations are fulfilled; includes variable considerations (volume discounts, credits, royalties --> requires estimates by management prior to completion of the contract)

The amount to which the seller expects to be entitled to receive when the contract performance obligations are fulfilled; includes variable considerations (volume discounts, credits, royalties --> requires estimates by management prior to completion of the contract)

Explain step 4 (Allocate the transaction price to performance obligations) in the revenue recognition process. The transaction price is allocated based on the customer's preference Required if there are multiple performance obligations (step two); based on stand-alone selling prices of the performance obligations (must be estimated if not available); Allocate total transaction price based on individual SSPs The transaction price is allocated equally among all obligations The transaction price is allocated based on the contract terms

Required if there are multiple performance obligations (step two); based on stand-alone selling prices of the performance obligations (must be estimated if not available); Allocate total transaction price based on individual SSPs

Explain step 5 (Recognize revenue when (or as) the seller satisfies a performance obligation) in the revenue recognition process. Revenue is recognized when the contract is signed Performance obligation is satisfied when the customer obtains control of the product or service; when the customer obtains the ability to direct the use and obtain substantially all of the remaining benefits (risks and rewards); This condition may be satisfied over time or at a point in time Revenue is recognized when the payment is received Revenue is recognized when the invoice is sent

Performance obligation is satisfied when the customer obtains control of the product or service; when the customer obtains the ability to direct the use and obtain substantially all of the remaining benefits (risks and rewards); This condition may be satisfied over time or at a point in time

What are the two complications when recognizing revenue, particularly in complex sales arrangements? Bundled sales contracts and long-term projects Sales with rebates and sales with financing Sales to international customers and sales with discounts Sales with returns and sales with warranties

Bundled sales contracts and long-term projects

What is a Bundled Sales Contract, and how does it affect revenue recognition? A contract where products are sold with a financing option A contract where multiple products are sold at a discount Two or more products or services are sold under the same sales agreement for one lump-sum price but are considered separate performance obligations (very common in software industry). Performance Obligation 1: Computer (revenue recognized upon transfer to customer). Performance Obligation 2: Technical support package (revenue recognized ratably over 2 year period - deferred revenue before revenue) A contract where services are bundled with a subscription

Two or more products or services are sold under the same sales agreement for one lump-sum price but are considered separate performance obligations (very common in software industry). Performance Obligation 1: Computer (revenue recognized upon transfer to customer). Performance Obligation 2: Technical support package (revenue recognized ratably over 2 year period - deferred revenue before revenue)

Revenue Recognition Standards: Five-Step Process and Performance Obligation Analysis

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Finance - Personal Finance

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Cards in this deck(69)

What is the core principle of the revenue standard, including the depiction of the transfer of promised goods or services?

What describes the condition(s) that must be present for the recognition of revenue from a contract with a customer?

What are the 5 steps to recognize revenue, including identifying contracts and performance obligations?

Explain step 1 (identify the contract with a customer) in the revenue recognition process.

Explain step 2 (Identify the performance obligations in the contract) in the revenue recognition process.

Explain step 3 (determine the transaction price) in the revenue recognition process.

Explain step 4 (Allocate the transaction price to performance obligations) in the revenue recognition process.

Explain step 5 (Recognize revenue when (or as) the seller satisfies a performance obligation) in the revenue recognition process.

What are the two complications when recognizing revenue, particularly in complex sales arrangements?

What is a Bundled Sales Contract, and how does it affect revenue recognition?

How do consignment sales work in terms of recognizing revenue?

How do sales returns work for recognizing revenue, and what adjustments are necessary?

What is the complication with revenue recognition on Long-term Contracts, and what factors must be considered?

What happens in long-term contracts if a single performance obligation is fulfilled over time?

What is Accounts Receivable, and how is it classified in financial statements?

What is Allowance for Uncollectible Accounts, and how does it affect accounts receivable?

What is net realizable value, and how is it reported in financial statements?

What is aging analysis and percentage of sales, and how are they used in estimating uncollectible accounts?

What is the timeline for Allowance for Uncollectible Accounts (AFUA), and what steps are involved?

How to record Allowance for Uncollectible Accounts, and what are the journal entries involved?

What happens if actual uncollectible accounts differ in amount from estimated uncollectible accounts?

What do companies require to disclose in footnotes regarding receivables and allowances?

What are pledging and factoring receivables, and how do they affect financial statements?

What is shifting income, and how can it be used in financial reporting?

What is earnings management, and what are the two motives behind it?

What is quality of earnings, and how can it be affected by earnings management?

What are earnings management tactics, and how do they impact financial reporting?

What are income smoothing and Big Bath, and how are they used in earnings management?

How does one determine expense recognition, and what principles are involved?

What are the three approaches to expense recognition, and how do they differ?

What is direct association in expense recognition, and how is it applied?

What is immediate recognition in expense recognition, and when is it used?

What is systematic allocation in expense recognition, and how is it applied?

Explain Inventory in the context of financial reporting, including its impact on the balance sheet and income statement.

What are the two general categories of businesses with inventory, and how do they differ?

What are the 3 inventory classifications, and what do they represent?

How does a company recognize inventory, and what criteria must be met?

How do you calculate Cost of Goods Sold (COGS), and what components are involved?

What are the 3 commonly used inventory costing methods, and how do they differ?

What happens with FIFO and LIFO in periods of rising prices, and how do they affect financial statements?

Why do many companies choose LIFO, and what is the LIFO conformity rule?

What is the LIFO reserve, and how is it calculated?

What is the lower of cost or net realizable value (LCNRV), and how is it applied to inventory?

How do you record lower of cost or net realizable value (LCNRV), and what are the journal entries involved?

What are the two inventory errors, and what do they affect in financial statements?

What are reasons for Inventory disclosures, and what insights do they provide?

What are long-term assets, and what are the two categories within them?

What are capitalized costs, and how are they reported in financial statements?

What are natural resources as an asset, and how are they accounted for?

What are capital expenditure characteristics, and what criteria must be met?

What costs happen after acquisition, and how are they treated in financial statements?

Explain depreciation with tangible long-term assets, and what are the 3 types?

What is the Straight-line depreciation formula, and how is it applied?

What are the differences between Straight-line and Double declining balance depreciation methods?

What are the steps for Units of Production Depreciation, and how is it calculated?

What is accumulated depreciation and book value, and how are they reported?

What happens when there are changes in accounting estimates, and how are they handled?

Explain gains and losses on asset sales, and how are they determined?

What are the steps in the process of a sale of a long-term asset, and what journal entries are involved?

What are the 2 categories of Intangible Assets, and how are they defined?

Intangible asset expensing vs capitalizing: What are the differences and criteria?

What is a copyright, and how is it accounted for in financial statements?

What is a trademark, and how is it accounted for in financial statements?

What is a Franchise Right, and how is it accounted for in financial statements?

What are digital assets like bitcoin, and how are they accounted for in financial statements?

What is amortization, and how is it applied to intangible assets?

What is asset impairment, and how is it determined and recorded?

What about intangibles with indefinite lives, and how are they tested for impairment?

What is goodwill, and how is it accounted for in financial statements?

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Revenue Recognition Standards: Five-Step Process and Performance Obligation Analysis

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