F1 - Module 1: I/S and BS Flashcards
(33 cards)
Gross Concept in I/S
Revenue and Sales are given in Gross values
Net Concept in I/S
Gains and Losses are always given net of tax
what are continuing Operations
Continuing Operations = Operating Activities (R, E) + Non-Operating Activities (G, L)
Multi-Step Income Statement
Sales Revenue (Sales Return) (Sales Discount) \_\_\_\_\_\_\_\_\_ Net Sales (Cost of Sales) Gross Profit Operating Activities Non Operating Activities
Operating Activities
AIDS- FU A - Advertising Expense I - Insurance Expense D - Depreciation Expense S - Salaries Expense F - Freight Out U - Utilities Expense
NOTE: Freight In goes to COGS
Non - Operating Activities
GRID-CILL
G- Gains and Losses
R - Rent Revenue
I -Interest Revenue
D - Dividend Revenue
C - Causalty Losses
I - Interest Expense
L - Loss from Sale of PPE
L - Loss from from Strikes/ Suppliers
Where does PY Adjustment reflect?
Any PY adjustment is reflected in Retained Earnings, and not I/S
Where does Gain and Losses on sale of securities goes in I/S?
Gains and Losses on sale of securities will be reported in OCI (Other Comprehensive Income)
Separate Disclosures
Separate Disclosures are only required for infrequent/ not so common events. E.G. Volcano Eruption etc./ Godly events
If it is a frequent event - no separate disclosure is required!
Revenue Recognition
I STAR-
I - Identify the Contract S - Separate Performance Obligations T - Transaction Price A - Allocate the Transaction Price R - Recognize Revenue
What happens when you combine two contracts w.r.t Revenue Recognition?
Contracts should be combined and treated as a single contract if they have the same/single commercial objective.
What happens when there is a contract modification w.r.t Revenue Recognition?
Treat as a new contract if price changes!
Presentation of Contracts w.r.t Revenue Recognition
When any party performs in a contract …
CONTRACT ASSET - An entity’s right to consideration in exchange for goods/services the entity has transferred to the customer
CONTRACT LIABILITY - must be booked when the company has an obligation to transfer goods/services to the customer
Incremental Cost of Obtaining the Contract
These are costs that would NOT have been incurred if the contract did not exist. E.G. Sales Commissions etc
- > Recognize as an asset if these are “recoverable”
- > Recognize as an expense if these costs would’ve been incurred regardless of whether contract was obtained or not
Coss to Fullfill the Contract
These costs are usually DM, DL, and FOH.
- > Capitalize as an asset if THEY MEET ALL OF THE FOLLOWING CRITERIA:
i. Expected to be recovered.
ii. Enhance the resources of the company
iii. DM, DL, and FOH - > > COSTS THAT ARE EXPENSED:
i. General and Admin Costs
ii. Wasted Labor and Material Cost
iii. Cost tied to performance obligations
Principal VS Agent (Contracts)
Principal -> Recognize revenue = Gross Consideration the company expects to receive
Agent -» Recognize Revenue = Fee/Commission for performing the agent function
Repurchsase Agreements
Three types of Repurchase Agreements
- Forward Option - Company’s obligation to repurchase the asset
- Call Option - Company’s right to repurchase the asset
- Put Option - Company’s obligation to repurchase the asset on customer’s request.
Accounting for Forward and Call Option
Accounting for FORWARD/ CALL Option
- Depends on whether the company must repurchase the asset for either
i. less than original price
ii. equal/ more than original price (financing agreement)
IF IT’s A FINANCING AGREEMENT:
- > Company will recogize asset
- > Recognize the financial liability for any consideration received from the customer
- > Recognize the interest expense as the difference between the amount of consideration received from the customer and amount paid to the customer
Accounting for Put Option
Depends on if the repurchase of the asset is
- less than the original selling price
- > If LESS: Than its a LEASE
- greater than the selling price
- > IF GREATER: Than its a Financing Agreement
Bill and Hold Arragements - REVENUE RECOGNITION
When a company bills a customer for a product that it has not yet delivered
REVENUE CANNOT BE RECOGNIZE TILL THE CUSTOMER GETS THE CONTROL
EXCEPTION:
- There is a substantive reason for arrangement i.e. customer has no space to put the product etc.
- Product is ready to transfer to the customer
- Company cannot use the product or direct it to another customerp-
Consignment - Revenue Recognition
Revenue is recognized when the DEALER SELLS THE PRODUCT TO THE CUSTOMER
Warranties
If the warrantly is bought separately - company will recognize revenue as a PERFORMANCE OBLIGATION
if not bought separately -> there is no obligation whatsoever!
NOTE: IF the law requires to be a warranty with the product -> than there’s no performance obligation!
REfund Liability
Company should recognize a refund liability if it anticipates to refund a portion or all of the consideration ($$$)
E.G. JE to record an initial liability on a cash sale $50,000 where 10% of items tend to be returned
Dr - Cash $50,000
Cr - Sales Revenue - $45000
Cr - Refund Liability - $5,000 (10% of 50,000)
JE to record cash paid to customer who returns $3000 in goods purchased
Dr - Refund Liability $3000
Cr - Cash - $3000
How can revenue be recognized “overtime”?
Revenue can be recognized over time if ANY of the following criteria is met
i. Company’s performance enhances/boost an asset that the customer controls.
ii. Customer receives and consumes the benefits of company’s performance as the company performs it (i.e. service contracts such as cleaning service or monthly service aka subscription services.
iii. Company cannot use the asset as “inventory”
