Revenue Recognition, Assets, and Cost Allocation Lecture Notes

These flashcards cover key vocabulary and concepts from the lecture including revenue recognition rules, asset classifications, acquisition costs, and depreciation methods.

Principal

A seller whose performance obligation is to provide goods and services, making them vulnerable to risks associated with holding inventory, and who records revenue for the total sales price paid by customers.

Agent

A party whose performance obligation is to facilitate a transaction between a principal and a customer, recording only the commission received as revenue.

Symbolic IP

Intellectual property that lacks significant standalone functionality and transfers a right of access to the seller’s IP because the benefit is affected by the seller’s ongoing activity; examples include trademarks, logos, and brand names.

Functional IP

Intellectual property recognized over time if the seller is expected to change the functionality over time and the customer is required to use the updated version, such as virus protection software.

Consignor

A company that physically transfers goods to another party but retains legal title and risks of ownership, postponing revenue recognition until the sale to a third party occurs.

Consignee

The entity that receives goods from a consignor and remits the selling price (less commission and approved expenses) once a buyer is found.

Breakage

The amount of a gift card that is not expected to be redeemed by the customer.

Cash Equivalents

Short-term, highly liquid investments that are readily convertible to cash with a maturity date no longer than three months from the purchase date, such as money market funds and treasury bills.

Restricted Cash

Cash set aside for a specific purpose or required by contract that is not available for current use and is generally reported as a noncurrent asset unless the related liability is current.

Accounts Receivable

Informal credit arrangements supported by an invoice, normally due in $30$ to $60$ days, and classified as current assets.

Trade Discounts

A percentage reduction from the list price, often given as quantity discounts to large customers.

Sales Discounts

Reductions in the amount to be paid by a credit customer if paid within a specified period, such as $2/10, n/30$, and treated as variable consideration.

Allowance (Sales Returns)

A special price reduction given as an incentive for a customer to keep merchandise rather than returning it for a refund.

Allowance Method

An accounting approach where Bad Debt Expense is recognized when accounts are estimated to be uncollectible and the allowance is created, rather than when specific accounts are written off.

Property, plant, and equipment

Productive assets that derive their value from long-term use in operations rather than from resale, including equipment, land, and buildings.

Land Improvements

Separately identifiable enhancements to property such as parking lots, driveways, private roads, fences, landscaping, and sprinkler systems.

Natural resources

Productive assets that are physically consumed in operations, such as timber, mineral deposits, and oil and gas reserves.

Intangible Assets

Productive assets that lack physical substance and represent exclusive rights with long-term but typically uncertain benefits.

Patent

The exclusive $20$-year right to manufacture a product or use a process.

Goodwill

The unique value of a company as a whole over and above all identifiable assets, calculated as: $\text{Goodwill} = \text{Purchase Price} - \text{FV Identifiable Net Assets}$.

Book Value

The recorded cost of an asset minus its accumulated depreciation.

R&D Costs

Expenditures typically expensed as incurred, including laboratory research, search for applications, and the design, construction, and testing of preproduction prototypes.

Depletion

The cost allocation process for natural resources.

Amortization

The cost allocation process for intangible assets.

Service Life

The estimated use that a company expects to receive from an asset.

Allocation Base

The cost of an asset that is expected to be consumed during its service life.

Straight-line (SL) method

A time-based depreciation method that allocates an equal amount of depreciable base to each year of the asset’s service life.

Units-of-production method

An activity-based depreciation method that computes a rate per measure of activity and multiplies it by actual activity to determine periodic depreciation.