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Transcript of Generally Accepted Accounting Principles; Revenue Recognition · Generally Accepted Accounting...
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 1
Generally AcceptedAccounting Principles;Revenue Recognition
Chapter 6
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 2
GAAPObjectives of financial reporting Useful, meaningful information for investing
and credit decisionsInformation on future cash flows
Qualitative characteristics ofaccounting information
Understandability, relevance, reliability,comparability
Elements of financial statements Assets, liabilities, equity/net assetsRevenues, expenses, gains, losses
Recognition and measurement criteria
Asset/liability measurement � historical cost,fair value basis
Revenue/expense recognition � cash basis,accrual method
Assumptions Entity concept, periodic concept, going concern
Principles Unit of measure, matching, consistency,disclosure
Constraints Materiality, conservatism, industry practices,cost/benefit
Specific accounting policies, procedures and rules
CICA Handbook
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 3
Revenue Recognition
❖ When may acompany recognizerevenue from atransaction?
❖ Three questions:
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 4
Revenue Recognition
❖ When may acompany recognizerevenue from atransaction?
❖ Three questions:➊ Have we transferred
to the buyersubstantially all of therisks and rewardsassociated with theproduct sold orservice provided?
Why did I buythis thing?
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 5
Revenue Recognition
❖ When may acompanyrecognize revenuefrom atransaction?
❖ Three questions:➋ Have we earned the
right to proceedsfrom the salebecause wecompleted ourshare of thetransaction?
The brochuresaid this wouldbe a LUXURY
cruise!
I amnot
payingfor
this!
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 6
Revenue Recognition
❖ When may acompany recognizerevenue from atransaction?
❖ Three questions:➌ Is the collectibility of
proceeds from thesale assured with areasonable degree ofcertainty?
Don�t worry,Chester! I�ll pay
up eventually.
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 7
Revenues vs. Cash Receipts
Customerselectsgoods.
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 8
Revenues vs. Cash Receipts
Customerselectsgoods.
Customerdoes not have
the cash topay now . . .
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 9
Revenues vs. Cash Receipts
Customerselectsgoods.
Customerdoes not have
the cash topay now . . .
Selleragrees to
deliver now,and receivecash later.
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 10
Revenues vs. Cash Receipts
Customerselectsgoods.
Customerdoes not have
the cash topay now . . .
Usually, 30days later,
sellerreceives
cash.
Selleragrees to
deliver now,and receivecash later.
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 11
Revenue Recognition Methods
Percentage-of-completion method
Completed-contract method
Completion-of-production method
Point-of-sale method
Instalment sales method
Cost recovery method
Before Sale(During/End
of Production) Time of SaleAfter Sale
(Cash Collection)
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 12
Expense Recognition
❖ When may acompany recognizean expense?
❖ Three questions:
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 13
Expense Recognition
❖ When may acompany recognizean expense?
❖ Three questions:➊ Have we included in
our income statementall of the costs andexpenses associatedwith the benefits(revenues) we realizedduring the year?
TheTheMatchingMatchingPrinciplePrinciple
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 14
Expense Recognition
❖ When may acompany recognizean expense?
❖ Three questions:➋ As we prepared these
financial statements,have our judgmentsand estimates beenappropriatelyconservative?
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 15
Expense Recognition
❖ When may acompany recognizean expense?
❖ Three questions:➌ Do all of our assets
still have thepotential to earnfuture cash flowsequal to their currentcosts?
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 16
Matching Principle
Current Period Costs
Commissions expenseAdvertising expenseOperating expensesInterest expense
Prior Period Costs
Cost of goods sold(inventory)Insurance expenseAmortization expense
Future PeriodCosts
Warranty expenseBad debts expense
Revenues(sales)
generated arematched by
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 17
How Conservative/AggressiveShould I Be with My Estimates?
Our employees hadcomputer trainingclasses before we
opened the business.
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 18
Should we be conservativeand expense the training
costs or be aggressive andrecord the costs as an asset
with future value?
How Conservative/AggressiveShould I Be with My Estimates?
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 19
The conservatism principleadvocates selecting the
method that will not createsurprises in the future.
How Conservative/AggressiveShould I Be with My Estimates?
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 20
Do All Assets Have the Potential to EarnCash Equal to Their Carrying Value?
GAAP requires that assetshaving no future cash-
earning benefit be chargedoff as an expense.
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 21
Income StatementClassification
❖ Income statementformat:● List all revenues.
● Deduct variouscategories ofexpenses.
● Compute net income.
SERVICE CompanyIncome Statement
For the Period Ending MM-DD-YY
Revenues $ XXX
Operating Expenses Expense #1 $ XXX Expense #2 XXX Expense #3 XXX
Total Operating Exp. XXX
Net Income fromContinuing Operations $ XXX
SERVICE CompanyIncome Statement
For the Period Ending MM-DD-YY
Revenues $ XXX
Operating Expenses Expense #1 $ XXX Expense #2 XXX Expense #3 XXX
Total Operating Exp. XXX
Net Income fromContinuing Operations $ XXX
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 22
Income StatementClassification
❖ Income statementformat:● List all revenues.
● Deduct variouscategories ofexpenses.
● Compute net income.
MERCHANDISE CompanyIncome Statement
For the Period Ending MM-DD-YY
Revenues $ XXXCost of Goods Sold XXXGross Margin $ XXX
Operating Expenses Expense #1 $ XXX Expense #2 XXX Expense #3 XXX
Total Operating Exp. XXX
Net Income fromContinuing Operations $ XXX
MERCHANDISE CompanyIncome Statement
For the Period Ending MM-DD-YY
Revenues $ XXXCost of Goods Sold XXXGross Margin $ XXX
Operating Expenses Expense #1 $ XXX Expense #2 XXX Expense #3 XXX
Total Operating Exp. XXX
Net Income fromContinuing Operations $ XXX
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 23
Terminology and Concepts
Gains &Losses
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 24
Terminology and Concepts
Gains andlosses result
from sales notin the ordinary
course ofbusiness.
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 25
Terminology and Concepts
If proceeds greaterthan carrying value
Gain
If proceeds less thancarrying value
Loss
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 26
Gain and Loss: Example
❖ Bob�s Boats, Inc. sellsfishing boats. On April5, Bob�s Boats sold landthe company owned inanother county to EveDevelopment Corp. for$20,000.
❖ The land has a carryingvalue on Bob�s books of$16,000.
Should the $20,000 receivedfrom Eve Development be
recorded as revenue?
Should the $20,000 receivedfrom Eve Development be
recorded as revenue?
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 27
Gain and Loss: Example
Should the $20,000 receivedfrom Eve Development be
recorded as revenue?
No. The sale of land by Bob'sBoats is not a sale in the
ordinary course of business.
The gain/loss on the transactionshould be computed andand reported separately.
Should the $20,000 receivedfrom Eve Development be
recorded as revenue?
No. The sale of land by Bob'sBoats is not a sale in the
ordinary course of business.
The gain/loss on the transactionshould be computed andand reported separately.
❖ Bob�s Boats, Inc. sellsfishing boats. On April5, Bob�s Boats sold landthe company owned inanother county to EveDevelopment Corp. for$20,000.
❖ The land has a carryingvalue on Bob�s books of$16,000.
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 28
Gain and Loss: Example
❖ Bob�s Boats, Inc. sellsfishing boats. On April5, Bob�s Boats sold landthe company owned inanother county to EveDevelopment Corp. for$20,000.
❖ The land has a carryingvalue on Bob�s books of$16,000.
W hat is the gain or loss onthe sa le tha t should be
recognized by Bob's Boats?
W hat is the gain or loss onthe sa le tha t should be
recognized by Bob's Boats?
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 29
Gain and Loss: Example
W hat is the gain or loss onthe sa le tha t should be
recognized by Bob's Boats?
Proceeds 20,000$
Carrying Va lue 16,000
Ga in on Sa leof Land 4,000$
W hat is the gain or loss onthe sa le tha t should be
recognized by Bob's Boats?
Proceeds 20,000$
Carrying Va lue 16,000
Ga in on Sa leof Land 4,000$
❖ Bob�s Boats, Inc. sellsfishing boats. On April5, Bob�s Boats sold landthe company owned inanother county to EveDevelopment Corp. for$20,000.
❖ The land has a carryingvalue on Bob�s books of$16,000.
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 30
Income StatementClassification
❖ DiscontinuedOperations
● Shows income/loss relatedto major segments of thebusiness that have beendiscontinued.
❖ Extraordinary Items● Defined by GAAP as a gain
or loss that is both unusualin nature and infrequent inoccurrence.
I hate it whena factory
burns down!!!
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 31
Income StatementClassification
❖ Changes in Accounting Policies● GAAP requires consistent application of principles from one
period to the next.
● When a change in principle occurs, special accounting andreporting of the effect of the change is required.
❖ Subsequent Events● An event that occurred after the financial statement date
that might influence a reader of the financial statements.
● If relates to conditions that existing at the financialstatement date, the statements should be adjusted.
● If relates to conditions after the financial statement date,the event should be disclosed in a footnote.
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Copyright © 1997 McGraw-Hill Ryerson Limited.Slide 32
End of Chapter 6
We�recruisin�
now,dude!