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Session 5 Rev. Rec II – Long-term Contracts Cash and Receivables

Session 5 Rev. Rec II – Long-term Contracts Cash and Receivables. Long-Term Contracts. Long-term Contracts. Methodology Entries Key Accounts Special Conditions. Key Accounts. Construction in progress-CIP Billings (contra to CIP) Cost of construction (similar to COGS). Methodology.

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Session 5 Rev. Rec II – Long-term Contracts Cash and Receivables

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  1. Session 5 Rev. Rec II – Long-term Contracts Cash and Receivables Intermediate Accounting I - Fall 2011

  2. Long-Term Contracts Intermediate Accounting I - Fall 2011

  3. Long-term Contracts • Methodology • Entries • Key Accounts • Special Conditions Intermediate Accounting I - Fall 2011

  4. Key Accounts • Construction in progress-CIP • Billings (contra to CIP) • Cost of construction (similar to COGS) Intermediate Accounting I - Fall 2011

  5. Methodology • Percentage of completion • Completed contract • Disclose in Summary of Significant Accounting Policies Intermediate Accounting I - Fall 2011

  6. Percentage of Completion • Determine costs to date • Estimate total costs • Calculate gross profit estimate Intermediate Accounting I - Fall 2011

  7. Entries-I • For both methods: • Record construction costs (actual payments) • CIP XXX Cash, etc. XXX • Record progress billings (actual billings) • A/R XXX Billings (contra) XXX • Record cash receipts (actual cash) • Cash XXX A/R XXX Intermediate Accounting I - Fall 2011

  8. Entries-II • For percentage of completion: • Record est. annual gross profit • CIP XXX Cost of constr. XXX Revenue XXX • Close out accounts • Billings XXX CIP XXX Intermediate Accounting I - Fall 2011

  9. Entries-III • For completed contract: • Record total gross profit • CIP XXX Cost of construction XXX Revenue XXX • Close out accounts • Billings XXX CIP XXX Intermediate Accounting I - Fall 2011

  10. Special Conditions • Losses • Single period: change in accounting estimate • Period amount • Overall: change in accounting estimate • Total amount Intermediate Accounting I - Fall 2011

  11. Time Value of Money • On your own!!! Intermediate Accounting I - Fall 2011

  12. Cash and Receivables Intermediate Accounting I - Fall 2011

  13. Cash & Receivables • Cash • Receivables • Discounts & Returns • Notes Receivable Intermediate Accounting I - Fall 2011

  14. Cash • Most liquid asset • Focal point on internal controls • Segregation of duties • Cash equivalents--90 day rule • Bank reconciliation • Cash restrictions • Restricted cash • Compensating balances • Overdrafts Intermediate Accounting I - Fall 2011

  15. Bank Reconciliations • Balance per bank statement • Add: deposits in transit • Less: outstanding checks • Equals corrected balance • Adjust your checkbook to the corrected balance Intermediate Accounting I - Fall 2011

  16. Accounts Receivable • Value at net realizable value • Use the allowance for doubtful accts. • Cash discounts--gross or net • Gross is preferred due to simplicity A/R xxx Sales xxx Cash xxx Sales discount xxx A/R xxx A/R, net xxx Sales, net xxx Cash xxx A/R xxx Interest Revenue xxx Gross Net Intermediate Accounting I - Fall 2011

  17. Sales Returns • Provide an allowance if material A/R xxx Sales xxx COGS xxx Inventory Sales Returns xxx A/R xxx Inventory xxx COGS xxx Sales Returns xxx Allowance for Returns xxx Invent.-Est.Rtns xxx COGS xxx Intermediate Accounting I - Fall 2011

  18. Doubtful Accounts • Provide an allowance if material Bad Debt Exp. xxx Allowance xxx Allowance xxx A/R xxx A/R xxx Allowance xxx Cash xxx A/R xxx • Income Statement: • % of Credit Sales Approach • Balance Sheet: • Aging Approach Intermediate Accounting I - Fall 2011

  19. Notes Receivable • Interest bearing…accrue interest • Non-interest bearing…discount interest • Use allowance to reflect bad debts Intermediate Accounting I - Fall 2011

  20. Financing Options • Assigning and pledging • Assigning requires recording of the transaction • Pledging requires disclosure • Factoring and securitization • With and without recourse • Securitization: purchase of A/R and resale as a security • Sales conditions: surrender of control • See Graphic 7-12 Intermediate Accounting I - Fall 2011

  21. Discounting (transferring) the Note • Accrue interest at transfer date • Add interest to maturity • Deduct discount to determine cash • See Illustration 7-8 • Treat as sale or loan • Sale treatment is preferred • See Graphic 7-10 Intermediate Accounting I - Fall 2011

  22. Monitoring A/R • Aging • DSO • Cash Conversion Cycle Intermediate Accounting I - Fall 2011

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