Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables

Intermediate Accounting I - Spring 2013

Sessions 5-6SCF

Rev. Rec. Installment Sales

Long-term ContractsCash & 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

E: persuasive evidence of an arrangement

F: fixed price


Points of Recognition

At delivery--usual approach Before delivery--L/T contracts After delivery--installment sales


Abusive Revenue Recognition

Bausch & Lomb Oracle Corporation “ship ahead” orders


Class Discussion

Why all the concern over revenue recognition?


General Considerations

See Graphic 5-3 in Chapter 5 Revenue recognition prior to delivery Revenue recognition at delivery Revenue recognition after delivery


Installment Sales

Cash receipts Pro-rate using gross profit percentage

Cost recovery method: Defer until after costs are covered


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)


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


Long-Term Contracts


Long-term Contracts

Methodology Entries Key Accounts Special Conditions


Key Accounts

Construction in progress-CIP

Billings (contra to CIP)

Cost of construction (similar to COGS)


Methodology

Percentage of completion Completed contract Disclose in Summary of Significant Accounting

Policies


Percentage of Completion

Determine costs to date Estimate total costs Calculate gross profit estimate


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


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


Entries-III For completed contract:

Record total gross profit CIP XXX

Cost of construction XXX

Revenue XXX Close out accounts

Billings XXX

CIP XXX


Special Conditions

Losses Single period: change in accounting estimate

Period amount Overall: change in accounting estimate

Total amount


Time Value of Money

On your own!!!


Cash and Receivables


Cash & Receivables

Cash Receivables Discounts & Returns Notes Receivable


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


Bank Reconciliations

Balance per bank statement Add: deposits in transit Less: outstanding checks Equals corrected balance

Adjust your checkbook to the corrected balance


Accounts Receivable Value at net realizable value

Use the allowance for doubtful accts. Cash discounts--gross or net

Gross is preferred due to simplicityA/R xxx

Sales xxxCash xxxSales discount xxx

A/R xxx

A/R, net xxxSales, net xxx

Cash xxxA/R xxxInterest Revenue xxx

Gross

Net


Sales Returns

Provide an allowance if materialA/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


Doubtful Accounts

Provide an allowance if materialBad 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


Notes Receivable

Interest bearing…accrue interest Non-interest bearing…discount interest Use allowance to reflect bad debts


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


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


Monitoring A/R

Aging

DSO

Cash Conversion Cycle

Documents

Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables