Exam 3 Ch 7 Study Guide Answers Chapter 7 The Revenue and Collection Cycle Allowable
Inadequate control activities over the invoicing function allow goods to be shipped that are not invoiced. Installment sales method allows recognizing income after the sale is made, and proportionately to the product of gross profit percentage and cash collected calculated. The unearned income is deferred and then recognized to income when cash is collected. For example, if a company collected 45% of total product price, it can recognize 45% of total profit on that product. The completed-contract method should be used only if percentage-of-completion is not applicable or the contract involves extremely high risks. Under this method, revenues, costs, and gross profit are recognized only after the project is fully completed. Thus, if a company is working only on one project, its income statement will show $0 revenues and $0 construction-related costs until the final year.
In this guide, we’ll help you understand the key aspects of revenue recognition, the new GAAP principles, what they mean for your business, and how automation can help you recognize revenue more efficiently and accurately. The staff disagrees with that argument. A registrant charges a fee to users for advertising a product for sale or auction on certain pages of its web site. The company agrees to maintain the listing for a period of time. The cost of maintaining the advertisement on the web site for the stated period is minimal. The audit team must review accounts for collectability and determine the adequacy of the allowance for doubtful accounts in support of the valuation assertion.
A company induces distributors to buy substantially more inventory than they can promptly
Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded? 68) A client has a separate sales group for its largest “preferred” customers. This is a select group of customers that normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform? A) Prepare a schedule of purchases and payments for these customers. B) Send out negative confirmations on a large sample of these customers.
- Within Generally Accepted Accounting Principles there are multiple ways to recognize revenues and can look dramatically different depending on the method chosen even when the economic reality is the same.
- The confirmation of customers’ accounts receivable rarely provides reliable evidence about the completeness assertion because A) many customers merely sign and return the confirmation without verifying its details.
- In October, Apple Computer’s stock price fell by almost half in 24 hours when the company said it would experience a 6% decline in revenue from the second to the third quarter.
- Also, the AICPA has issued statements of position and the FASB Emerging Issues Task Force has issued pronouncements addressing numerous revenue recognition issues.
- These arrangements are, in substance, consignment arrangements until the customer accepts the product as set forth in the contract with the seller.
- D) Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.
For example, if the customer acceptance provisions were based on meeting certain size and weight characteristics, it should be possible to determine whether those criteria have been met before shipment. Acceptance provisions based on seller-specified objective criteria.
Revenues can be recognized on a sales basis, percentage of completion, cost recoverability and installment. Using the sales basis method, revenue is recognized at the moment the goods or services are transferred to the buyer. In this case, revenue is not recognized even if cash is received before the transaction is complete.
Management should have a process for continually reviewing revenue and comparing it to budgets and forecasts. Management should also constantly scrutinize total write- offs of accounts receivable, merchandise returns, and the timeliness of collections. Internal auditors can perform periodic reviews of the customers’ balances by sending confirmations to the customers. A customer reply on a positive confirmation says “We dispute the $250 charge. We believe it is excessive.” This confirmation A) provides evidence of existence. B) does not provide evidence of existence because the customer may refuse to pay the $250 charge. C) provides evidence that the account was inaccurately recorded. D) provides evidence that the account should be written off.
When reviewing bank confirmation for any liens on receivables, the auditor is testing the ______ assertion
The accounts receivable clerk who is a CPA has been…. Revenue accounting is fairly straightforward when a product is sold and the revenue is recognized when the customer pays for the product. However, accounting for revenue can get complicated when a company takes a long time to produce a product. As a result, there are several situations in which there can be exceptions to the revenue recognition principle. Confirmations provide evidence of existence as well as rights & obligations of accounts and notes receivable. They do not provide strong evidence on the valuation of accounts receivable.
This is an advance receipt of cash for which the consultancy service is to be provided in the month of January, 2016. On January 05, 2016, the relevant consultancy services are provided by John Marketing consultants to SD corporation. It’s worth noting that QuickBooks and Xero don’t offer revenue recognition, but you can still connect them with 3rd-party software to streamline the whole process. Revenue recognition can be questioned by auditors, and having the most up-to-date data available means your audit won’t be delayed because of inconsistencies.
Auditing Chapter 7: Revenue and
Corporations may use a variety of agreements for sales-type transactions, so the nature of the agreement must be understood in order to ensure that revenue recognition requirements have been met. Customer acceptance has become a key focus for revenue recognition, despite some vagueness in the SEC staff’s position as to when it occurs. Alpha Company uses its sales invoices for posting perpetual inventory records.
Before exploring the concept of revenue recognition further through a few examples, we would briefly explain the two conditions (i.earned and ii.realized or realizable) imposed by the revenue recognition principle. Although the rules seem simple, transactions can become quite complicated, raising questions about the timing and measurement of revenue. At least six FASB statements of financial accounting standards relate directly to revenue recognition, such as SFAS No. 45, Accounting for Franchise Fee Revenue.
Accountants should be under orders to record sales and accounts receivable when A) the customer’s order is received B) all supporting documentation of shipping is in order C) the item has been paid for. D) the terms are agreed upon. According to revenue recognition principle, the John Marketing Consultants should recognize the revenue on January 05, 2016, not on December 25, 2015 when https://business-accounting.net/ the cash is received SD from corporation. In January 2000, the EITF issued a report (EITF 99-17) noting that a company can include revenue from advertising barter transactions only if the company has received cash for “similar transactions” within the last six months. Furthermore, FASB wants companies to disclose the barter amounts in their footnotes as a percentage of revenues.
An adjusting journal entry occurs at the end of a reporting period to record any unrecognized income or expenses for the period. Accrued revenue—an asset on the balance sheet—is revenue that has been earned but for which no cash has been received. Alicia Tuovila is a certified public accountant with 7+ years of experience in financial accounting, with expertise in budget preparation, month and year-end closing, financial statement preparation and review, and financial analysis. She is an expert in personal finance and taxes, and earned her Master of Science in Accounting at University of Central Florida. Now, in building this widget and shipping it to the customer, your company has costs equating to $50, which are accounted for under deferred expenses.
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Vouching is used in testing the existence or occurrence assertions. The existence assertion is more important than the completeness assertion when auditing accounts receivable. 62) Auditors sometimes use comparisons to be recognized, revenues must also be realized or realizable and of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? C) Merchandise purchases being charged to selling and general expense.
- Alpha Brewery Corporation recorded sales through January 4, 2005, dating them December 31, 2004.
- The SEC questioned Priceline.com regarding its practice of reporting revenues at gross when reporting at net would seem more appropriate.
- B) Each sales invoice is supported by a prenumbered shipping document.
- Sending customer statements of what has been billed, what has been paid, and ending balances on a monthly basis enables customers to spot discrepancies and notify the company.
- An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when A) no reply to a positive confirmation request is received.
- Consultation with knowledgeable project managers or engineers may be necessary in such circumstances.