Chapter 5 Flashcards

(32 cards)

1
Q

When do companies recognize revenue under ASU No. 2014-09?

A

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods and services.

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2
Q

How much revenue do companies recognize under ASU No.2014-09?

A

For the amount the company expects to be entitled to receive in exchange for those goods and services.

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3
Q

What are the five steps to Revenue Recognition?

A
  1. Identify the contract
  2. Identify the performance obligation(s)
  3. Determine the transaction price
  4. Allocate the transaction price
  5. Recognize revenue when (or as) each performance obligation is satisfied
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4
Q

What is an indicator of recognizing revenue at a single point in time?

A

Control

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5
Q

What does control mean?

A

Control means the customer has direct influence over the use of the good or service it benefits.

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6
Q

A customer is more likely to control a good or service if the customer has:

A
  1. An obligation to pay the seller
  2. Legal title to the asset
  3. Physical possession of the asset
  4. Assumed the risk and rewards of ownership
  5. Accepted the asset
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7
Q

Revenue is recognized over a period of time if one of the following three conditions hold:

A
  1. The customer consumes the benefit of the seller’s work as it is performed
  2. The customer controls the asset as it is created
  3. The seller is creating an asset that has no alternative use to the seller and the seller has the legal right to receive payment for progress to date even if the contract is cancelled
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8
Q

What are the two methods of estimating progress towards completion?

A
  1. Out-put based

2. In-put based

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9
Q

How is the out-put based estimation method measured?

A

Measured as the proportion of the goods or services transferred to date

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10
Q

How is the in-put based estimation method measured?

A

Measured as the proportion of effort expended thus far relative to the total effort expected to satisfy the performance obligation

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11
Q

When are goods and services viewed as separate performance obligations?

A

When they are distinct.

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12
Q

Under what conditions is a good or service distinct?

A
  1. If it is capable of being distinct

2. Separately identifiable from other goods and services

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13
Q

A contract exists under what conditions?

A
  1. Has commercial substance
  2. Has been approved by the seller and buyer
  3. Specifies the rights of the seller and buyer
  4. Specifies payment terms
  5. Is probable that the seller will collect the amount it is entitled to receive under the contract
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14
Q

A contract does not exist if:

A
  1. Neither the seller nor the buyer has performed any obligations under the contract, and
  2. Both the seller and the buyer can terminate the contract without penalty
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15
Q

Three nonperformance obligations are

A
  1. Prepayment
  2. Quality-assurance warranty
  3. Right of return
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16
Q

A warranty is an extended warranty if either:

A
  1. The customer has the option to purchase the warranty separately, or
  2. The warranty provides a service to the customer beyond quality assurance
17
Q

How do you determine the transaction price?

A
  1. Estimate variable consideration and determine whether it is constrained
  2. Identify whether the seller is acting as a principal or an agent
  3. Consider the TVM
    4 Account for payment by the seller to the customer
18
Q

What is variable consideration?

A

A part of the transaction price that is dependent on some future event such as royalties, reimbursements, volume discounts and product returns, incentive payments and rebates

19
Q

How do you estimate variable consideration?

A

Through expected value or most likely amount

20
Q

What are indicators for revenue reversal?

A
  1. Poor or limited evidence to base an estimate
  2. Dependance of the estimate on factor’s outside of the sellers control
  3. A broad range of outcomes that could occur
  4. A long delay before uncertainty resolves
21
Q

What is the right of return?

A

When the customer can return the good if not satisfied or unable to resell it

22
Q

How does a seller account for a return?

A
  1. Records a liability for cash the seller anticipates refunding to customers, or
  2. Reduces accounts receivable if the seller has not yet paid
23
Q

What is an agents performance obligation?

A

An agents performance obligation is to facilitate a transaction between a buyer and seller

24
Q

What is the principals performance obligation?

A

A principals performance obligation is to deliver goods and services

25
How does a principal record revenue?
The principal records revenue as the total sales price. The principal also accounts for cost of goods sold.
26
How does an agent record revenue?
An agent records revenue as the commission received.
27
When should you record Time Value of Money?
When the contract contains a significant financing component.
28
When can sellers assume the financing component is not significant?
If the period between delivery and payment is less than one year.
29
What are the three methods of estimating the stand-alone selling price?
1. Adjust market assessment approach 2. Expected cost plus margin approach 3. Residual Approach
30
What is the adjusted market assessment approach?
Price if the product were sold in the market.
31
What is the expected cost plus margin approach?
Estimate the cost of satisfying a performance obligation and then add on an appropriate profit margin.
32
What is the residual approach?
Subtract the sum of the known or estimated stand-alone prices of other goods and services in the contract from the stand-alone price.