Podcast
Questions and Answers
What is the GAAP definition of revenue?
What is the GAAP definition of revenue?
- Transaction profits
- Increasing an asset or decreasing a liability (correct)
- Only decreasing liabilities
- Only increasing assets
When is revenue recognized under GAAP?
When is revenue recognized under GAAP?
When it is realized or realizable and earned.
Match the SEC criteria to recognize revenue:
Match the SEC criteria to recognize revenue:
Evidence of an arrangement exists = 1 Goods delivered or services rendered = 2 Price is fixed or determinable = 3 Collectibility is reasonably assured = 4
Match the IFRS guidelines to recognize revenue:
Match the IFRS guidelines to recognize revenue:
When does timing of revenue recognition occur?
When does timing of revenue recognition occur?
When is revenue recognized at product delivery?
When is revenue recognized at product delivery?
What are the journal entries for revenue recognition at product delivery?
What are the journal entries for revenue recognition at product delivery?
When may revenue be recognized at service delivery?
When may revenue be recognized at service delivery?
When must revenue be recognized for services performed at a single point in time?
When must revenue be recognized for services performed at a single point in time?
What happens if payment is received before the final service?
What happens if payment is received before the final service?
How is service revenue recognized over the service period?
How is service revenue recognized over the service period?
What is recognized by the Completed Contract Method?
What is recognized by the Completed Contract Method?
What is the disadvantage of long-term contracts regarding revenue recognition?
What is the disadvantage of long-term contracts regarding revenue recognition?
What does Billings in Excess of Cost indicate?
What does Billings in Excess of Cost indicate?
What is the Zero-Gross Profit Method?
What is the Zero-Gross Profit Method?
What are the IFRS % of completion criteria?
What are the IFRS % of completion criteria?
Study Notes
Revenue Recognition Concepts
- Revenue is defined as an increase in assets or decrease in liabilities through delivering goods or services as part of ongoing operations.
- Under GAAP, revenue is recognized when it is realized or realizable and earned.
Revenue Recognition Criteria
- SEC requires evidence of an arrangement, delivery of goods/services, fixed price, and assured collectibility.
- IFRS guidelines streamline criteria to delivery, fixed price, and assured collectibility.
Timing of Revenue Recognition
- Revenue recognition can occur at the point of delivery, before delivery, or after delivery.
Revenue Recognition Modes
- At product delivery, revenue is recognized when legal title shifts from seller to buyer. Journal entries include debiting cash or accounts receivable and crediting sales revenue, as well as accounting for cost of goods sold (COGS).
- For service delivery, revenue recognition can occur at a single point in time or be spread over multiple periods, usually ratably.
Journal Entries for Revenue Recognition
- In the case of service revenue, if payment is made in advance, use journal entries to reflect unearned revenue and service revenue accordingly.
- When recognizing service revenue over a period, the same journal entry procedure is repeated until all unearned service revenue is recognized.
IFRS and Service Revenue Recognition
- IFRS allows for revenue recognition at a single point, over a service period, or through percentage-of-completion methods.
Long-Term Contracts and Revenue Recognition
- Long-term contracts can misrepresent financial performance if revenue is only recognized upon contract completion. Solutions include:
- Percentage-of-completion (most common method under both IFRS and GAAP).
- Completed contract method (used only when other options are unavailable).
- Zero product approach (specific to IFRS).
Completed Contract Method
- Under this method, all revenue and costs are recognized only when the project is complete, suitable for short-term or immaterial contracts.
Cost and Billings Treatment
- Costs in Excess of Billings appear as an asset on the balance sheet.
- Billings in Excess of Costs are recognized as a liability, showing when billings surpass the costs incurred.
Zero-Gross Profit Method
- This procedure involves recognizing actual costs and matching them with revenue; gross profit is recognized only at project completion.
Percentage of Completion Criteria
- Under US GAAP, reliable measurements of completion, contract revenues, and costs are essential. All revenue recognition conditions must be met.
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Description
This quiz covers the key concepts of revenue recognition under GAAP and IFRS, emphasizing the criteria necessary for recognizing revenue. It also discusses the timing and modes of revenue recognition for both goods and services, providing an overview of journal entries related to these processes.
