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Income Measurement and Profitability Analysis

. . . . Revenue Recognition. DefinitionIs the item an asset, liability, equity, revenue, expense, gain, or loss?. MeasurabilityDoes it possess the attributes that permit reliable measurement?. RelevanceWill it make a difference to the decision maker?. ReliabilityIs it a faithful representation?.

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Income Measurement and Profitability Analysis

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    1. Income Measurement and Profitability Analysis CHAPTER 4

    2. Revenue Recognition

    3. Revenue Principle

    4. Revenue Principle

    5. Revenue Recognition at Delivery

    6. Revenue Recognition Before Delivery

    7. Percentage-of-Completion Method

    8. Measuring Progress Toward Completion

    9. Measuring Progress Toward Completion

    10. Measuring Progress Toward Completion Current Period Revenue Total Revenue from Contract Percent Complete Total Revenue to Recognize - Revenue Recognized in Prior Periods = Revenue Recognized in Current Period

    11. Percentage-of-Completion Method During 2004, West, Inc. enters into a contract with Putnam County to build a bridge over Cane River. At the end of 2004, the information on the next page was gathered by Wests accountant.

    12. Percentage-of-Completion Method

    13. Percentage-of-Completion Method

    14. Percentage-of-Completion Method

    15. Percentage-of-Completion Method

    16. Revenue Recognition Before Delivery SERVICE SALES Completed Performance Method Proportional Performance Method Specific Performance Method

    17. Completed Performance Used when revenue is earned by performing a series of acts, and the last act is so important that revenue is only considered earned if it is performed.

    18. Proportional Performance Used to recognize service revenue that is earned by more than one act and when the service is rendered in more than one accounting period. Similar performance acts - equal amount for each act. Dissimilar performance acts - in proportion to direct costs of each act. Similar acts with a fixed period for performance.

    19. Specific Performance Used to account for revenue that is earned by performing a single act.

    20. Revenue Recognition After Delivery When we are uncertain about the collectibility of the sales revenue, we should defer revenue recognition.

    21. Installment sales Cost recovery Real estate sales Right of return Revenue Recognition After Delivery

    22. Installment Sales Method Sale and cost of sale recorded as usual. Compute gross margin rate on the installment sales. Recognize gross margin as cash is received. Gross margin not realized is deferred until a future period.

    23. Installment Sales Method During 2000, Sams Appliances made sales that qualified for the installment sales method of accounting with the following characteristics: The remaining amount will be collected in 2001. Prepare the journal entries to record the installment sales transactions during 2000.

    24. Installment Sales Method

    25. Installment Sales Method

    26. Installment Sales Method

    27. Installment Sales Method

    28. Cost Recovery Method Like the installment sales method, cost recovery is used when we are uncertain about the collectibility of the sales revenue. No profit is recognized until cost of item sold is fully recovered.

    29. Cost Recovery Method

    30. Cost Recovery Method

    31. Cost Recovery Method

    32. Cost Recovery Method

    33. Real Estate Sales Often characterized with a relatively small down payment and long payment periods. These payment characteristics combined with the speculative nature of many transactions creates uncertainty as to collectibility of receivable.

    34. Right of Return In some industries it is common practice that the sales terms allow customers the right to return goods under specified conditions and over long periods of time.

    35. Right of Return Recognize revenue at point of sale if: Selling price is fixed or determinable. Buyer is obligated to pay the seller. Buyer is obligated even in case of theft or physical destruction. Buyer has economic substance apart from that provided by the seller. Seller has no obligation for future performance. Future returns can be estimated.

    36. Franchise Sales Initial franchise fees can be recognized as revenue only after the Franchisor has substantially performed the services promised in the franchise agreement. Collectibility of the initial franchise fee is reasonable assured.

    37. Software Revenue Recognition

    39. Receivables Turnover Ratio

    40. Average Collection Period

    41. Inventory Turnover Ratio

    42. Average Days in Inventory

    43. Asset Turnover Ratio

    45. Profit Margin on Sales

    46. Return on Total Assets

    47. Return on Equity

    48. End of Chapter 4

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