Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

AFM 291 > Week 2 - Revenue Recongition > Flashcards

Week 2 - Revenue Recongition Flashcards

(72 cards)

Start Studying
1
Q

What is recognition?

A

It’s the process of presenting and recognizing an item in the financial items as opposed to just putting the item in the notes.

There are many transactios and items that meet the defintion of financial statement elemtns but not appearon financial statements.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is revenue recognition?

A

Revenue recognition is the point in time when a business officially records revenue in its financial statements.

In accounting rules (like IFRS or GAAP), companies can’t just record revenue whenever they feel like it — there are clear guidelines.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Can revenue be recognized at different stages in theory

A
  • Yes — in theory, revenue could be recognized at any point in the value creation process (e.g., discovery, production, delivery).
  • Why? Because value is created at many different stages, not just when the product is sold or paid for.
  • Example: You could argue revenue starts when new knowledge (like a vaccine discovery) is developed.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the key stages in a business’s value creation process?

A

Invent product or discover resource

Receive order from customer

Start production

Finish production

Deliver product / record sale

Collection period (get paid)

Complete cash collection

Warranty period

Expiry of warranty

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Why is it wrong to recognize revenue in the earlier stages of a business when there is value creation and not during when goods/services are created?

A
  • It hurts comparability — financials would look too different across firms.
  • Recognizing revenue too early is less reliable and harder to verify — payment may not happen.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How does less reliable accounting numbers less helpful for management performance?

A
  • They make it easier for management to manipulate results, causing moral hazard.
  • This makes it harder to assess true performance and align incentives properly.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

When should we recongize revenue then in accounting?

A

Because value is created at many points, but accounting standards only allow revenue to be recognized when it’s earned and measurable (typically around Step 5–7).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What standard governs revenue recognition under IFRS?

A

IFRS 15 – Revenue from Contracts with Customers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What types of contracts does IFRS 15 apply to?

A

All types—written or verbal, formal or informal. It covers everything from a grocery sale to a construction contract.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the main focus of IFRS 15?

A

Contracts where a company is providing goods or services to a customer.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are contracts excluded under IFRS 15

A
  • Lease contracts (covered by IFRS 16)
    • Insurance contracts (covered by IFRS 4)
    • Financial instruments (covered by IFRS 9)
    • Non-monetary exchanges between companies in the same industry to help sell to customers
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the five steps of revenue recongition (don’t need to memorize it will be givn)

A

Identify the contract with the customer.

Identify the performance obligations.

Determine the transaction price.

Allocate the transaction price to performance obligations.

Recognize revenue in accordance with performance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What does identify the contract mean?

A

First, determine if there is a contract with a customer that has the potential to generate revenue.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What does identify the performance obligations?

A

The contract must clearly define what the company needs to do and what it will recieve as consideration (e.g., deliver goods or services for cash).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does ‘determine the trasnaction price mean’?

A

The contract should specify what the company will receive as payment (consideration) from the customer.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What does recognize revenue mean?

A

Revenue is recorded as each performance obligation is satisfied, typically when goods are delivered or services are performed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What does allocate the trasnaction price mean?

A

The total price is allocated to the different performance obligations in the contract based on their individual value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What does it mean in the key requirements about identifying the contract the concept of commercial substance?

A

The contract must result in a real economic change (i.e., no “sham” or meaningless exchanges like two companies swapping identical coal).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

When discussing performance obligations what does some contracts with customers have?

A

More than one performance obligation

These performance obligations can be a bundle of goods or services or some of both.

We need to seprate every performance obligation that is being provided

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

How do we seprate performance obligations?

A

Whether one good or service is distinct from another

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is the criteria for a good or service to be distinct!

A

(a) The customer can benefit from it on its own or with other resources (goods or servies that the customer already has and or can easily get from someone else to use along with the item being provided.

(b) It is separately identifiable from other promises in the contract.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Is credit risk a determining factor in choosing transaction price

A

NAURRR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is a transaction price?

A

The trasnaction price is the amount the customer pays for the good - and its based on predetermiend fixed amounts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is non-cash consideration

A

Its when a customer does not pay in cash but offer something else close of value (trading in an old car) as part of the contract or deal.

The company needs to figure out how much that non-cash item is worth so they can add it to the cash amount to determine the total transaction price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What if they can't find the price of the non-cash consideration?
If they can't figure out how much the non-cash item is worth they can use the price of the new thing their buying (the "stand-alone selling price") to estimate it.
26
What is signficant financing component?
* Sometimes, a customer doesn't pay right away. If there is a big gap between when the company gives the customer the product and when the customer pays, the company has to consider the time value of money (basically, money now is worth more than money later) either discount it to the present to figure out the transaction price?
27
What about normal short-term payments do we need to adjust for TVM?
If the company expects to get paid within 1 year, they don’t have to adjust for time value of money.
28
What is consideration payable to customer?
In some cases Sometimes, companies give money or discounts back to customers — like cash-back, rebates, or coupons — to encourage more sales. These amounts are called consideration payable to customers, and they must be deducted from revenue.
29
Who usually benefits from incentives?
Directly to their customer (like a grocery store), or Indirectly to the final shopper (like you and me at the store).
30
How to estimate the consideration payable to customers?
Estimated redeming of couponds % × Number of Coupons Issued × Coupon Value (this would be a credit to consuderation payable)
31
What if the company is uncertain about the amount of coupons theymight issue?
Expected Value = use probabilities for all possible outcomes (best for many small transactions like coupons). Most Likely Amount = use the single most likely amount (best if only 1 outcome is likely)
32
What is variable consideration?
The total amount a company will receive from a customer is not fully known or fixed at the time of sale.
33
Give 2 examples of variable consideration.
Coupons (uncertainty in how many will be used) Volume discounts (final price depends on total quantity purchased)
34
How do we allocate the transaction price for performance obligations?
Allocate the total transaction price to each performance obligation based on their relative stand-alone selling prices.
35
What is a stand-alone selling price?
It’s the price a company would sell a good or service for on its own, not as part of a bundle.
36
What is the formula to allocate the transaction price to each obligation?
Stand-alone price / total stand-alone prices * trasnaction prices
37
Why might the transaction price be less than the sum of stand-alone prices?
Because the seller might offer a bundle discount or price concession.
38
What if a stand-alone price isn’t directly observable?
Use estimation methods allowed by IFRS 15: Adjusted market assessment Expected cost plus margin Residual approach (only in certain cases)
39
What is the adjusted market assessment approach?
Estimate what customers are willing to pay or check competitor pricing for similar goods/services.
40
What is the expected cost plus margin approach?
Estimate the cost to provide the good/service and add a typical profit margin.
41
What is the residual approach? When is it allowed?
Residual = Total transaction price minus known stand-alone prices of other obligations. Use only if: (i) the item has a highly variable price, or (ii) no set price has been established yet.
42
When does a company recognize revenue under IFRS 15 Step 5?
when the control of the promised good or service is transferred to the customer either at a point in time or over a period of time.
43
What are the two ways performance can occur?
At a point in time (e.g., product delivery) Over time (e.g., long-term construction contract)
44
When can performance obligations be satisfied over time (IFRS 15 ¶35)?
If any one of these 3 is true: Customer receives and consumes the benefits as performed Company’s work creates/enhances an asset the customer controls The work has no alternative use and the company has a right to payment for work done
45
Why is it important to determine if performance is over time?
It affects when revenue is recognized — over multiple periods instead of all at once.
46
What’s the default rule under IFRS 15: point in time or over time?
By default, revenue is recognized at a point in time, unless the criteria for over time are met.
47
What are indicators that control has transferred at a point in time?
Customer is obligated to pay Customer has legal title Customer has physical possession Customer bears risks/rewards Customer has accepted the asset
48
What is a consignment sale?
A consignment sale is when the consignor (seller) provides goods to a consignee (agent/retailer) to sell, but the consignee can return unsold goods. The consignor retains control until the goods are sold.
49
When does the consignor recognize revenue in a consignment sale?
Only when control is transferred, which happens after the goods are sold or the return right expires.
50
Why is revenue not recognized when goods are delivered to the consignee?
Because the consignee can return the goods, so control has not been transferred.
51
What is an installment sale?
An arrangement where the buyer pays over time, but receives the product at the beginning of the payment period. The seller may keep legal title until all payments are made.
52
Why is revenue recognition tricky in installment sales?
There is uncertainty about collection. If it’s not clear the seller will get paid, then revenue should not be recognized upfront.
53
How is revenue handled if collection is uncertain?
Revenue is not recognized at delivery. Instead, gross profit is deferred and only recognized as cash is collected.
54
In Durable Furnishings’ example, What journal entry is made at the time of sale (with uncertainty)? Retail price: $1,000,000 Cost of goods sold: $800,000 Gross margin: 20% Gross profit: $200,000 (deferred at first)
Dr. Installment A/R: $1,000,000 Cr. Inventory: $800,000 Cr. Deferred Gross Profit (liability): $200,000 🚫 No revenue yet!
55
In Durable Furnishings’ example, What journal entry is made when a $50,000 payment is received later? Retail price: $1,000,000 Cost of goods sold: $800,000 Gross margin: 20% Gross profit: $200,000 (deferred at first)
Dr. Cash: $50,000 Cr. Installment A/R: $50,000 Dr. Deferred Gross Profit (20% of $50K): $10,000 Dr. COGS (80% of $50K): $40,000 Cr. Sales Revenue: $50,000
56
When is it okay to recognize all revenue upfront in installment sales?
When collection is reasonably certain. If it’s not certain, profits must be deferred.
57
What is a bill-and-hold arrangement?
It’s when the seller keeps the goods at the customer’s request after billing, even though the goods are ready, accepted, and paid for.
58
Why would a customer request a bill-and-hold arrangement?
Lack of storage space Waiting on other suppliers Doesn’t need the goods immediately
59
Can the seller recognize revenue in a bill-and-hold arrangement?
Yes — if control has transferred to the buyer and all other revenue recognition criteria are met.
60
What must be true for revenue to be recognized in a bill-and-hold sale?
Goods are ready for delivery Customer has inspected and accepted them Customer has paid The seller is only storing the goods temporarily as a service
61
What role does the seller play after the sale in a bill-and-hold?
Only provides a minor storage service — not part of the main performance obligation.
62
What is something we need to look at first when recongizing revenue?
Revenue - Is a part of normal business operations Gain on Sale - Not a part of normal business operations
63
What is ASPE - revenue recongition - what type of model?
Its a model used to recongize revenue as a performance based model
64
Under IFRS explain the one thing that can help us understanding commercial substance?
Does the risk change? Are there new or different risks after the transaction (e.g., market demand, credit, operating costs)? If risks are the same → No commercial substance 2. Does the timing of cash flows change? Will the company receive/pay cash earlier or later now? If timing stays the same → No commercial substance 3. Does the amount of future cash flows change? Will the company make more or less money from the new asset or deal? If amounts are unchanged → No commercial substance
65
For significant financing - what do we have to seprate when finding the transaction price?
Interest income and revenue
66
How do we compute cashflows for significant financing?
Use annuity to compute the cash flows for revenue and subtarct whatever's left for interest income from what they expect to recieve in the future
67
What is the annuity formula to compute the equal cash payments for a singificant financing example?
PV = Payments * (1-1/(1+i)^n)/i
68
What is a note recievable
Its a contract that a customer will pay us when they won't pay us upfront but they will have the item - its a debit
69
What is the effective interest rate method?
Its a method used under IFRS for singifcant finacing options - look at example in slides to redo
70
Significant financing component: Sample Scenario: Microfarm Ltd. normally sells a series C tractor for $85,000 cash on delivery. The series C tractor has a gross margin of 40%. A current customer has requested payment over time and Microfarm Ltd. and the customer have agreed to the following delivery and payment terms (the customer’s credit history is very good): Tractor delivered on January 1, 2023 3 equal payments to be made on December 31st (2023, 2024 and 2025) Annual interest rate of 10% Determine the transaction price and show the method of recongizing revenue over time using the correct method in IFRS and ASPE
Look in google note - for tutorial
71
What is the straight line method?
Its a method under ASPE for signifcant financing examples
72
Do they have a choice under ASPE between straight-line and efefctive interest rate for significant finacing options?
YES

AFM 291 (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions