ACC 310 Exam 2 Terminology

performance obligation

good or service that is distinct from other goods or services in the contract

• a good or service is distinct if it is both:

  • capable of being distinct

  • separately identifiable from other goods or services in the contract

commercial substance

• transaction that is expected to significantly change a business’ future cash flows, financial position or economic outcomes

variable consideration

portion of a transaction price depends on the outcome of future events

• examples:

  • construction→ incentive payments

  • entertainment and media→ royalties

  • Health care→ medicare and medicaid reimbursements

  • manufacturing→ volume discounts and product returns

  • telecommunications → rebates

principal

controls goods or services and is responsible for providing them to the customer

agent

doesn’t control goods or services but rather facilitates transfers between sellers and customers

license-functional intellectual property

transfer a right of use so revenue is recognized at a point in time

• example: music download

• exception: if the seller is expected to change the functionality over time and the customer is required to use the updated version, revenue is recognized over a period of time

  • example: virus protection

license-symbolic intellectual property

provides right of access over a period of time so revenue is recognized over that period of time (licensing period)

• examples: trademarks, logos, brand names, franchise rights

franchise

typically includes the sale of a license for SIP and sales of products and services

• involves:

  • franchisor: original company who grants the rights to sell products and services

  • franchisee: purchasing the rights to sell the products and services

bill & hold arrangement

exists when a customer purchases goods but requests that the seller retain physical possession of the goods until a later date

internal control

• a process designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

  • effectiveness and efficiency of operations

  • reliability of financial reporting

  • compliance with applicable laws and regulations

• encourages adherence to company policies and procedures

• promote operational efficiency

• minimize errors and theft

• enhance the reliability and accuracy of accounting data

Sarbanes-Oxley Act of 2002

• a company is to document its internal controls and assess their adequacy

• auditors to express an opinion on management’s assessment

pledged accounts receivable

a promise to relinquish control of an asset (or assets) in payment (or partial payment) of an amount due

• done as a collateral for a loan

  • forfeited if the borrower defaults on the loan

perpetual inventory system

• continually adjust the inventory account for each change in inventory caused by a:

  • purchase

  • sale or

  • return of inventory

• allows management to determine goods on hand on any date

• used by majority of major companies to maintain record of transactions

periodic inventory system

• adjusts the inventory account and records cost of goods sold only at the end of each reporting period

• records merchandise purchases, purchase returns, purchase discounts and freight-in in temporary accounts

  • determines period’s cogs by combining temporary accounts with the inventory account:

    • beginning inventory + net purchases - ending inventory = cogs

consignment goods

• goods given to another store to sell on the company’s behalf

obsolete goods

items that can no longer be sold at normal prices because demand has disappeared, they have been replaced by newer products or they have reached the end of their product life cycle

lifo liquidation

• previous years layers of inventory may need to be sold

  • result in old costs being matched with current selling prices

    • if costs have been increasing, these produce higher net income (“paper profits”)

    • if costs have been decreasing, these produce lower net income (deferring income taxes)

lifo pool

• grouping inventory units into pools based on physical similarities of the individual units

  • within pools, all purchases during a period are considered to have been made at the same time and at the same cost

  • individual unit costs are converted to an average cost for the pool

• if the quantity of ending inventory for the pool increases:

  • ending inventory= beginning inventory + single layer added during the period at the average cost of the pool