Term
Under accrual accounting:
Revenues are “recognized” (recorded)
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Definition
was soon as they are both:
nEarned, meaning the seller has performed a service or conveyed an asset to the buyer;
nMeasurable, meaning the value to be received for that service or asset is reasonably assured and can be measured with a high degree of reliability.
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Term
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Definition
| are expired costs—the assets used up to produce revenues—and are recorded in the same accounting period in which the revenues are recognized. Expenses are “matched” to revenues! |
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Term
wTwo things happen when income is
recognized in the financial statements:
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Definition
1.Net assets (i.e., gross assets minus gross liabilities) are increased by an identical amount.
2.Owner’s equity is increased by the amount of the income.
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Term
| Criteria for revenue recognition (When?) |
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Definition
Condition 1: The critical event in the process of earning the revenue has taken place.
Condition 2: The amount of revenue that will be collected is reasonably assured and is measurable with a
reasonable degree of reliability.
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Term
| Criteria for recognizing revenue during production: |
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Definition
nA specific customer must be identified and an exchange price agreed upon. Usually a formal contract must be signed.
nA significant portion of the services to be performed has been performed, and the expected costs of future services can be reliably estimated.
nAn assessment of the customer’s credit standing permits a reasonably accurate estimate of the amount of cash that will be collected.
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Term
| Criteria for recognizing revenue on completion of production: |
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Definition
nThe product is immediately saleable at quoted market prices.
nUnits are homogeneous.
nNo significant uncertainty exists regarding the cost of distributing the product.
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Term
| Time of sale is the dominant practice in most industries. However, sometimes revenue is not recognized until after the time of sale because: |
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Definition
nExtreme uncertainty exists regarding the amount of cash to be collected from customers (customer credit risk, contingencies,
right-of-return).
nFuture services to be provided are substantial, and their costs cannot be estimated with reasonable precision.
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Term
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Definition
1.Special or Unusual items
2.Discontinued Operations
3.Extraordinary items
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Term
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Definition
wWrite-downs or write-offs of receivables, inventory, equipment leased to others, and intangible assets.
wGains or losses from the exchange or translation of foreign currencies.
wGains or losses from the sale or abandonment of property, plant or equipment.
wSpecial on-time charges from corporate restructurings.
wGains or losses from the sale of investments
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Term
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Definition
wCompany must disclose
discontinued operations for:
nReportable segment
nOperating segment
nReporting unit
nSubsidiary
nAsset group
wMust restate all presented periods
with the discontinued operations
separated out.
wMust disclose:
nOperating income or loss of the segment from the beginning reporting date until the disposal date
nGain or loss from this disposal (sales price less book value).
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Term
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Definition
wMust be BOTH:
wUnusual
The underlying event or transaction possesses a high degree of abnormality, and taking into account the environment in which the company operates, that event or transaction is unrelated to the ordinary activities of the business.
wInfrequent
The underlying event or transaction is a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the company operates.
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Term
wWhen undisclosed nonrecurring gains and losses are included as part of “Income from continuing operations”, analysts may tend to:
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Definition
nOverestimate future income (undisclosed gains)
nUnderestimate future income (undisclosed losses)
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Term
wThree basic types of accounting changes:
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Definition
1.Change in accounting principle.
2.Change in accounting estimate.
3.Change in reporting entity (see Chapter 16 for details).
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