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Accounting Study Guide By Accountinginfo Com

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to be recognized, revenues must also be realized or realizable and

During the three and nine months ended September 30, 2017, revenues generated from Entity D represented approximately 26% and 21% of the Company’s total revenue. The Company generated charging service revenues from a customer and equipment sales revenue from a customer .

  • Beginning on April 17, 2014, when 350 Green’s assets and liabilities were transferred to a trust mortgage, 350 Green became a Variable Interest Entity (“VIE”).
  • When a company includes its accounts receivable in its revenue calculations, it is claiming revenue that it hasn’t actually received.
  • A talent agent whose fee receivable from its principal (i.e., a celebrity) for arranging a celebrity endorsement for a five-year term is cancelable by the celebrity if the celebrity breaches the endorsement contract with its customer.
  • D) The credit manager has misappropriated remittances from customers whose accounts have been written off.
  • A) Recorded sales in the sales journal are supported by invoices.

The matching principle’s main goal is to match revenues and expenses in the correct accounting period. The principle allows a better evaluation of the income statement, which shows the revenues and expenses for an accounting period or how much was spent to earn the period’s revenue. By following the matching principle, businesses reduce confusion from a mismatch in timing between when costs are incurred and when revenue is recognized and realized. Often, a business will spend cash on producing their goods before it is sold or will receive cash for good sit has not yet delivered. Without the matching principle and the recognition rules, a business would be forced to record revenues and expenses when it received or paid cash. This could distort a business’s income statement and make it look like they were doing much better or much worse than is actually the case. By tying revenues and expenses to the completion of sales and other money generating tasks, the income statement will better reflect what happened in terms of what revenue and expense generating activities during the accounting period.

This situation is an example of a violation of which of the following assertions? The document that generates recording of a sale is the A. Be the first to know when the JofA publishes breaking news about tax, financial reporting, auditing, or other topics. Select to receive all alerts or just ones for the topic that interest you most. Review of conflict-of-interest statements obtained by the company from its management.

Revenues Not Recognized At Sale

In planning the audit of all revenue transactions, the auditor must understand the client’s industry, business and products as well as its procedures for accepting orders, shipping goods, billing and recording sales and removing product from inventory. When a client engages in bill-and-hold transactions, he or she should determine whether the transactions comply with the What is bookkeeping SEC’s criteria. The employ sales cutoff test which are test that ensure that sales are recorded in the proper period, generally when they are shipped, and that the cost of the sales is recorded and removed from inventory. Procedures include tracing shipping documents before and after year-end to the sales journal to ensure the sale was recorded in the proper period.

to be recognized, revenues must also be realized or realizable and

A) Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries. B) Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval. C) Separation of duties between receiving cash and posting the accounts receivable ledger.

Accounts Receivable & Revenue

This method allows recognizing revenues even if no sale was made. This applies to agricultural products and minerals. Revenue realized during an accounting period is included in the income. When a sale of goods carries a high uncertainty on collectibility, a company must defer the recognition of revenue until after delivery.

Delivery has occurred or services have been rendered. The seller’s price to the buyer is fixed or determinable. A company’s revenue is its total income before expenses. Revenue includes payment for services the company performs and merchandise it sells. It also includes any interest or dividends the company earns from its investments. Companies use their total revenue to calculate profit during a given period by subtracting the period’s expenses, such as the cost of goods sold and payroll, from the total revenue earned.

In that situation, that documentation could represent persuasive evidence of an arrangement. Which of the following audit procedures is the most effective in testing sales for understatement? B. C. D. Analyze the aged trial balance of recorded accounts receivable. Confirm recorded accounts receivable. Trace a sample of shipping documents to sales invoices recorded in the sales journal.

ASC 740 sets out a consistent framework for preparers to use to determine the appropriate recognition and measurement of uncertain tax positions. ASC 740 uses a two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not to be sustained. The amount of the benefit is then measured to be the highest tax benefit which is greater than 50% likely to be realized. ASC 740 also sets out disclosure requirements to enhance transparency of an entity’s tax reserves. The Company recognizes accrued interest and income tax penalties related to unrecognized tax benefits as a component of income tax expense. In the future when management looks at J. Smith’s payment history, the account’s activity will show the eventual collection of the amount owed.

Even though the sale was realizable in that the sale for $5,000 was initiated, it was not earned until January when the pool table was delivered. There are three main exceptions to the revenue recognition principle. Somemanufacturersmay income summary recognize revenue during the production process. This is common in long-term construction and defense contracts that take years to complete. The revenue in these cases is considered earned at various stages ofjobcompletion.

Generally, asset lives range from ten to forty years for buildings and three to seven years for office furniture and equipment, vehicles, and decontamination and processing equipment. Leasehold improvements are capitalized and amortized over the lesser of the term of the lease or the life of the asset. Maintenance and repairs are charged directly to expense as incurred.

About Revenue

Actual results could differ from those estimates. See Notes 8, 11, 12 and 13 for estimates of discontinued operations and environmental liabilities, closure costs, income taxes and contingencies for details on significant estimates. The last exception to the revenue recognition principle is companies that recognize revenue when the cash is actually received. This is a form of cash basis accounting and is most commonly found in installment sales. The assets produced and sold or services rendered to generate revenue also generate related expenses. Accounting standards require that companies using the accrual basis of accounting and match all expenses with their related revenues for the period, so that the income statement shows the revenues earned and expenses incurred in the correct accounting period. Property and equipment expenditures are capitalized and depreciated using the straight-line method over the estimated useful lives of the assets for financial statement purposes, while accelerated depreciation methods are principally used for income tax purposes.

to be recognized, revenues must also be realized or realizable and

All intercompany transactions and balances have been eliminated in consolidation. In January 2000, the EITF issued a report (EITF 99-17) noting that a company can include revenue from advertising barter transactions only if the company has received cash for “similar transactions” within the last six months. Furthermore, FASB wants companies to disclose the barter amounts in their footnotes as a percentage of revenues.

B) one of the sales clerks has not been preparing charge slips for credit sales to family and friends. C) one of the IT control clerks has been removing all sales invoices applicable to his account from the data file. D) the credit manager has misappropriated remittances from customers whose accounts have been written off. B) Disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.

Recognition Of Revenue Prior To Delivery

The seller must not retain any significant specific performance obligations. PUBLIC COMPANIES that fail to report to be recognized, revenues must also be realized or realizable and quarterly earnings which meet or exceed analysts’ expectations often experience a drop in their stock prices.

A Selected Revenue Recognition Issues

Among the most common methods of doing this are the bill-and-hold transaction and a long list of sham transactions involving shipping, billing and/or related-party involvements. Both the SEC and the AICPA seek to increase independent retained earnings auditors’ awareness of problems associated with these practices. Accrued income is money that’s been earned, but has yet to be received. Under accrual accounting, it must be recorded when it is incurred, not actually in hand.

Recognizing Revenue At Point Of Sale Or Delivery

Once the EITF reaches a consensus, it becomes GAAP and is considered a mandatory requirement under SAS no. 69 and the board will not take further action. Unfortunately the executives at another company did not act soon enough to ward off revenue recognition problems. As a result, both the chief operating officer and the chief financial officer at the software maker were replaced when the company investigated improper accounting practices. Taking quick action, the company said it would file restated results of operations, although it did not indicate the extent of the restatement. Please be aware that some of the links on this site will direct you to the websites of third parties, some of whom are marketing affiliates and/or business partners of this site and/or its owners, operators and affiliates. We may receive financial compensation from these third parties.

The matching principle, along with revenue recognition, aims to match revenues and expenses in the correct accounting period. It allows a better evaluation of the income statement, which shows the revenues and expenses for an accounting period or how much was spent to earn the period’s revenue. To determine whether sales transactions have been recorded in the proper accounting period, the auditor performs cutoff tests. A) Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period. B) Analyze transactions occurring within a few days before and after year-end. C) Confirm year-end transactions with regular customers. D) Examine cash receipts in the subsequent period.

This procedure is related to which of the following assertions? In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would be obtained from A) an aging schedule of past due accounts which the auditor has tested. B) correspondence with the client’s collection agency. C) financial statements of individual customers. D) no reply to negative confirmations. ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards which requires subjective assumptions.

Changing trends in shipments into, and sales from, a sales channel or separate class of customer that could be expected to have a significant effect on future sales or sales returns. Shipments of product at the end of a reporting period that significantly reduce customer backlog and that reasonably might be expected to result in lower shipments and revenue in the next period. Confirmations of accounts receivable provide the most evidence for which of the following assertions? If the auditor’s procedures uncover the existence of related-party transactions that were concealed deliberately, the auditor must determine their effects on the audit, especially the implications for management integrity. Review of accounting records for large, unusual or nonrecurring transactions or balances, paying particular attention to transactions recorded at or near the end of the reporting period.

40 A systematic method would be on a straight-line basis, unless evidence suggests that revenue is earned or obligations are fulfilled in a different pattern, in which case that pattern should be followed. Topic 13 is no longer applicable upon a registrant’s adoption of ASC Topic 606. Topic 13 provides the staff’s views regarding the general revenue recognition guidance codified in ASC Topic 605. ASC Topic 606 provides a single set of revenue recognition principles governing all contracts with customers and supersedes the revenue recognition framework in ASC Topic 605, which eliminates the need for Topic 13. Prior to adoption of ASC Topic 606, registrants should continue to refer to prior Commission and staff guidance on revenue recognition topics.

Products that are determined to be obsolete, if any, are written down to net realizable value. Based on the aforementioned periodic reviews, the Company recorded an inventory reserve for slow-moving or excess inventory of $192,000 and $154,000 as of September 30, 2017 and December 31, 2016, respectively. Under the allowance method, an adjustment is made at the end of each accounting period to estimate bad debts based on the business activity from that accounting period. Established companies rely on past experience to estimate unrealized bad debts, but new companies must rely on published industry averages until they have sufficient experience to make their own estimates. Bob’s Billiards, Inc. sells a pool table to bar on December 31 for $5,000. The pool table was not paid for until January 15th and it was not delivered to the bar until January 31. According to the revenue recognition principle, Bob’s should not record the sale in December.

Revenue cannot be recognized until the service has been performed and collectability has been assured. Regardless of the market’s fixation on revenue, all companies ultimately need real–not managed–profits. SAB 101 both reaffirms long understood revenue recognition concepts and provides helpful guidance. Perhaps, more than anything else, continued good faith efforts by accounting professionals are the best defense against revenue recognition problems. FASB established the EITF in 1984 to help it identify problems affecting financial reporting and implementation of authoritative pronouncements. It charged the task force with providing guidance so that all publicly traded companies handled like transactions similarly. In a perfect situation, the EITF would identity emerging diversity in practice or questionable application of GAAP before the SEC had to take action.

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