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Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables

Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables. Realization Principle. Process must be complete Collection must be assured. Revenue Recognition ASC 605-10-S99 (SAB 101). C: collection must be assured D: delivery must have occurred

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Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables

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  1. Sessions 5-6 SCFRev. Rec. Installment SalesLong-term ContractsCash & Receivables Intermediate Accounting I - Spring 2013

  2. Realization Principle • Process must be complete • Collection must be assured Intermediate Accounting I - Spring 2013

  3. Revenue Recognition ASC 605-10-S99 (SAB 101) • C: collection must be assured • D: delivery must have occurred • E: persuasive evidence of an arrangement • F: fixed price Intermediate Accounting I - Spring 2013

  4. Points of Recognition • At delivery--usual approach • Before delivery--L/T contracts • After delivery--installment sales Intermediate Accounting I - Spring 2013

  5. Abusive Revenue Recognition • Bausch & Lomb • Oracle Corporation • “ship ahead” orders Intermediate Accounting I - Spring 2013

  6. Class Discussion • Why all the concern over revenue recognition? Intermediate Accounting I - Spring 2013

  7. General Considerations • See Graphic 5-3 in Chapter 5 • Revenue recognition prior to delivery • Revenue recognition at delivery • Revenue recognition after delivery Intermediate Accounting I - Spring 2013

  8. Installment Sales • Cash receipts • Pro-rate using gross profit percentage • Cost recovery method: • Defer until after costs are covered Intermediate Accounting I - Spring 2013

  9. Special Revenue Issues • Right of return (distributors) • Consignment (transfer of risk) • Software and similar issues --ASC 985-605-25 (SOP 97-2) and ASC 605-25-25(EITF 08-1) Intermediate Accounting I - Spring 2013

  10. Software Revenue Recognition • SOP 97-2 • Pro-rata based on revenue measurement • Give consideration to related costs as well • EITF 08-1 • Expands SOP 97-2 to situations other than s/w Intermediate Accounting I - Spring 2013

  11. Long-Term Contracts Intermediate Accounting I - Spring 2013

  12. Long-term Contracts • Methodology • Entries • Key Accounts • Special Conditions Intermediate Accounting I - Spring 2013

  13. Key Accounts • Construction in progress-CIP • Billings (contra to CIP) • Cost of construction (similar to COGS) Intermediate Accounting I - Spring 2013

  14. Methodology • Percentage of completion • Completed contract • Disclose in Summary of Significant Accounting Policies Intermediate Accounting I - Spring 2013

  15. Percentage of Completion • Determine costs to date • Estimate total costs • Calculate gross profit estimate Intermediate Accounting I - Spring 2013

  16. Entries-I • For both methods: • Record construction costs (actual payments) • CIP XXX Cash, etc. XXX • Record progress billings (actual billings) • A/R XXX Billings (contra) XXX • Record cash receipts (actual cash) • Cash XXX A/R XXX Intermediate Accounting I - Spring 2013

  17. Entries-II • For percentage of completion: • Record est. annual gross profit • CIP XXX Cost of constr. XXX Revenue XXX • Close out accounts • Billings XXX CIP XXX Intermediate Accounting I - Spring 2013

  18. Entries-III • For completed contract: • Record total gross profit • CIP XXX Cost of construction XXX Revenue XXX • Close out accounts • Billings XXX CIP XXX Intermediate Accounting I - Spring 2013

  19. Special Conditions • Losses • Single period: change in accounting estimate • Period amount • Overall: change in accounting estimate • Total amount Intermediate Accounting I - Spring 2013

  20. Time Value of Money • On your own!!! Intermediate Accounting I - Spring 2013

  21. Cash and Receivables Intermediate Accounting I - Spring 2013

  22. Cash & Receivables • Cash • Receivables • Discounts & Returns • Notes Receivable Intermediate Accounting I - Spring 2013

  23. Cash • Most liquid asset • Focal point on internal controls • Segregation of duties • Cash equivalents--90 day rule • Bank reconciliation • Cash restrictions • Restricted cash • Compensating balances • Overdrafts Intermediate Accounting I - Spring 2013

  24. Bank Reconciliations • Balance per bank statement • Add: deposits in transit • Less: outstanding checks • Equals corrected balance • Adjust your checkbook to the corrected balance Intermediate Accounting I - Spring 2013

  25. Accounts Receivable • Value at net realizable value • Use the allowance for doubtful accts. • Cash discounts--gross or net • Gross is preferred due to simplicity A/R xxx Sales xxx Cash xxx Sales discount xxx A/R xxx A/R, net xxx Sales, net xxx Cash xxx A/R xxx Interest Revenue xxx Gross Net Intermediate Accounting I - Spring 2013

  26. Sales Returns • Provide an allowance if material A/R xxx Sales xxx COGS xxx Inventory Sales Returns xxx A/R xxx Inventory xxx COGS xxx Sales Returns xxx Allowance for Returns xxx Invent.-Est.Rtns xxx COGS xxx Intermediate Accounting I - Spring 2013

  27. Doubtful Accounts • Provide an allowance if material Bad Debt Exp. xxx Allowance xxx Allowance xxx A/R xxx A/R xxx Allowance xxx Cash xxx A/R xxx • Income Statement: • % of Credit Sales Approach • Balance Sheet: • Aging Approach Intermediate Accounting I - Spring 2013

  28. Notes Receivable • Interest bearing…accrue interest • Non-interest bearing…discount interest • Use allowance to reflect bad debts Intermediate Accounting I - Spring 2013

  29. Financing Options • Assigning and pledging • Assigning requires recording of the transaction • Pledging requires disclosure • Factoring and securitization • With and without recourse • Securitization: purchase of A/R and resale as a security • Sales conditions: surrender of control • See Graphic 7-17 Intermediate Accounting I - Spring 2013

  30. Discounting (transferring) the Note • Accrue interest at transfer date • Add interest to maturity • Deduct discount to determine cash • See Illustration 7-18 • Treat as sale or loan • Sale treatment is preferred • See Graphic 7-19 Intermediate Accounting I - Spring 2013

  31. Monitoring A/R • Aging • DSO • Cash Conversion Cycle Intermediate Accounting I - Spring 2013

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