BUS 20 - Chapter 5 Flashcards

Revenue and Receivables

Revenues

Inflows of assets or settlements of liabilities (or both) from delivering goods or services as part of an entity’s core operations

Accounting Location: 

-Income Statement

Revenue Recognition

The process of determining:

1. how much revenue to recognize (record)

2. when to recognize it

Basic Recognition Idea

Revenue is recognized then goods or services are transferred to or preformed for customers for the amount the company expects to be entitled to receive in exchange

Performance Obligation

A promise in a contract to transfer a distinct good or service to the customer. (Revenue is recognized upon the satisfaction of a ______.)

Deferred Revenue

A liability created when a company recieves cash before satisfying its performance obligation (i.e, before providing the service or goods)

Accounting Location: Balance Sheet

Net Revenues

Total revenues less any amounts for returns and discounts

Accounting Location: Income Statement

When to Recognize Revenue (Satisfaction of Performance Obligation)

When customer has:

• An obligation to pay the selling company

• Received legal title to the good or received the service

• Physical possession of the asset

• Assumed the risk and reward of ownership to the good or received the service

• Accepted the goods or service

When will Nordstrom (online sales) recognize revenue?

Nordstrom recognizes revenue at the shipping point, the point in time where control has transferred to the customer (when the items are handed over to the shipper like FedEx, not when delivered)

When should American Airlines recognize revenue for advanced ticket sales?

They recognize passenger revenue when transportation is provided (when the flight occurs)

• Initial Sale: Ticket sales for future flights are initially recorded as air traffic liability (deferred revenue) on the Balance Sheet.

• Recognition: The liability is reduced, and revenue is recognized only when the company fulfills its promise by providing the flight (transportation).

Recognizing Revenue Over a Period of Time

When:

• The customer consumes the benefit of the seller’s work as it is performed (e.g, a cleaning service).

• The customer controls the asset as it is created (e.g, constructing a building extension)

• Revenue is recognized in proportion to the amount of performance obligatin that has been satisfied.

When should Dropbox (cloud storage) recognize revenue for an annual plan?

Dropbox recognizes revenue ratably over the contractual term (per month) because the customer receives and consumes the benefits of the platform throughout the contract period.

Contracts with Multiple Performance Obligations

1. Identify the separate performance obligations (e.g, Xbox console and Xbox Live subscription)

2. Allocate the single transaction price to each obligation based on their relative standalone prices.

3. Recognize revenue for each obligation separately as it is satisfied.

Revenue Adjustment Occur Due to..

1. Sale returns

2. Trade discounts

3. Sales discounts

Net Revenues

Gross revenue - (Returns +Allowances + Discounts)