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CORPORATE FINANCIAL REPORTING

In corporate financial reporting, revenue recognition is crucial for accurately representing a company's financial health. This guide condenses SEC criteria into two primary rules: the receipt of a measurable asset from the customer and the completion of promised services. We explore various revenue recognition methods, including cash basis and accrual basis, installment sales, cost recovery, and percentage completion. Additionally, we cover the handling of bad debts, sales returns, and adjustments, emphasizing effective accounts receivable management and strategies for accelerating collection.

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CORPORATE FINANCIAL REPORTING

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  1. 7 – Reporting Revenue & Receivables CORPORATE FINANCIAL REPORTING Revene & Receivables

  2. In chapter 4, we condensed the 4 SEC criteria into two criteria: 1. The company has received a measurable asset from the customer and 2. The revenue is earned - meaning that the company has done what the customer is paying it to do. REVENUE CRITERIA FORACCRUAL BASIS Revenue & Receivables

  3. Cash basis Accrual basis Installment sales method Cost recovery Percentage completion Completed contract METHODS USED TO RECOGNIZE REVENUES / EXPENSES Revenue & Receivables

  4. You are the CFO of Ractee Stereo Sales Company. You sell me a stereo system for $10,000. The system cost you $6,000; you paid for the system this year. I promise to pay you: in 2011: 2,000 in 2012: 3,000 in 2013: 5,000 total 10,000(plus interest, of course, but we will ignore that interest) RACTEE STEREO SALES COMPANY Revenue & Receivables

  5. Our construction company gets a contract to build a tunnel to Winter Park, Colorado. The contract price is $18,000; our engineers estimate it will cost us $12,000 over 3 years to build Results: YearWe CollectWe Spend 2011 3,000 4,000 2012 5,000 6,000 2013 10,000 2,000 RACTEE CONSTRUCTION COMPANY Revenue & Receivables

  6. Hard core stuff – “revenue adjustments” bad debts sales returns sales discounts RECEIVABLES Revenue & Receivables

  7. Primarily two ways to account for bad debts: - the direct write-off method - the “allowance” - percentage of credit sales method - aging method RECEIVABLES - BAD DEBTS Revenue & Receivables

  8. 2011: Sales on account: $100,000 Collect from customers: $80,000 2012: Sales on account: 150,000 Collect from customers: $110,000 Customer owing us $5,000 from 2011 calls and says “Sorry - bye, bye.” BAD DEBTS - THE DIRECT METHOD What will appear in F/S? Revenue & Receivables

  9. 2011: Sales on account: $100,000 Collect from customers: $80,000 2012: Sales on account: 150,000 Collect from customers: $110,000 Customer owing us $5,000 from 2011 calls and says “Sorry - bye, bye.” BAD DEBTS - THE ALLOWANCE METHOD - What will appear in F/S? Revenue & Receivables

  10. Our company makes sales on account of $100,000 in December 2011. Our past experience is that .2% of sales are returned the next month. RECEIVABLES - SALES RETURNS What will appear in F/S? Revenue & Receivables

  11. Factoring Borrow Securitize ACCELERATING COLLECTIONS OF RECEIVABLES (Monetizing) Revenue & Receivables

  12. ? QUESTIONS Revenue & Receivables

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