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Session 4 Statement of Cash Flows Revenue Recognition-I

Session 4 Statement of Cash Flows Revenue Recognition-I. Businesses are like Fruit Trees. Fruit = Operating Activities. Trunk & Branches = Investing Activities. Roots = Financing Activities. Statement of Cash Flows. FASB 95—1987 (ASC 230-10-45) Components

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Session 4 Statement of Cash Flows Revenue Recognition-I

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  1. Session 4 Statement of Cash FlowsRevenue Recognition-I Intermediate Accounting I - Fall 2011

  2. Businesses are like Fruit Trees Fruit = Operating Activities Trunk & Branches = Investing Activities Roots = Financing Activities Intermediate Accounting I - Fall 2011

  3. Statement of Cash Flows • FASB 95—1987 (ASC 230-10-45) • Components • Operating cash: Operations and working capital • Investing cash: Non-current assets and investments • Financing cash: L/T debt, equity and dividends • Reconciliation of net inc. to ops. cash • Disclosure of non-cash invest. & financing transactions Intermediate Accounting I - Fall 2011

  4. Net Income vs. Cash FlowIndirect Method • Net Income • +/- Non-cash Items • +/- Changes in Operating Working Capital • = Cash Flow from Operations • Disclosure of interest and tax payments Intermediate Accounting I - Fall 2011

  5. Indirect vs. Direct Method • FASB prefers the direct method • FASB requires net income to cash from operations reconciliation • Components: • Cash from customers • Cash from dividends • Cash from interest income • Other operating cash receipts • Cash paid to suppliers • Cash paid to employees • Cash paid for taxes • Cash paid for interest • Other operating cash payments Intermediate Accounting I - Fall 2011

  6. Realization Principle • Process must be complete • Collection must be assured Intermediate Accounting I - Fall 2011

  7. Revenue Recognition ASC 605-10-S99 (SAB 101) • C: collection must be assured • D: delivery must have occurred • E: persuasive evidence of an arrangement • F: fixed price Intermediate Accounting I - Fall 2011

  8. Points of Recognition • At delivery--usual approach • Before delivery--L/T contracts • After delivery--installment sales Intermediate Accounting I - Fall 2011

  9. Abusive Revenue Recognition • Bausch & Lomb • Oracle Corporation • “ship ahead” orders Intermediate Accounting I - Fall 2011

  10. Class Discussion • Why all the concern over revenue recognition? Intermediate Accounting I - Fall 2011

  11. General Considerations • See Graphic 5-3 in Chapter 5 • Revenue recognition prior to delivery • Revenue recognition at delivery • Revenue recognition after delivery Intermediate Accounting I - Fall 2011

  12. Installment Sales • Cash receipts • Pro-rate using gross profit percentage • Cost recovery method: • Defer until after costs are covered Intermediate Accounting I - Fall 2011

  13. Special Revenue Issues • Right of return (distributors) • Consignment (transfer of risk) • Software and similar issues --ASC 985-605-25 (SOP 97-2) and ASC 605-25-25(EITF 08-1) Intermediate Accounting I - Fall 2011

  14. Software Revenue Recognition • SOP 97-2 • Pro-rata based on revenue measurement • Give consideration to related costs as well • EITF 08-1 • Expands SOP 97-2 to situations other than s/w Intermediate Accounting I - Fall 2011

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