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

2. Intermediate Accounting I - Spring 2013 Realization Principle n Process must be complete n Collection must be assured

3. Intermediate Accounting I - Spring 2013 Revenue Recognition ASC 605-10-S99 (SAB 101) n C: collection must be assured n D: delivery must have occurred n E: persuasive evidence of an arrangement n F: fixed price

4. Intermediate Accounting I - Spring 2013 Points of Recognition n At delivery--usual approach n Before delivery--L/T contracts n After delivery--installment sales

5. Intermediate Accounting I - Spring 2013 Abusive Revenue Recognition n Bausch & Lomb n Oracle Corporation n “ship ahead” orders

6. Intermediate Accounting I - Spring 2013 Class Discussion n Why all the concern over revenue recognition?

7. Intermediate Accounting I - Spring 2013 General Considerations n See Graphic 5-3 in Chapter 5 n Revenue recognition prior to delivery n Revenue recognition at delivery n Revenue recognition after delivery

8. Intermediate Accounting I - Spring 2013 Installment Sales n Cash receipts n Pro-rate using gross profit percentage n Cost recovery method: n Defer until after costs are covered

9. Intermediate Accounting I - Spring 2013 Special Revenue Issues n Right of return (distributors) n Consignment (transfer of risk) n Software and similar issues --ASC 985-605-25 (SOP 97-2) and ASC 605-25-25(EITF 08-1)

10. Intermediate Accounting I - Spring 2013 Software Revenue Recognition n SOP 97-2 n Pro-rata based on revenue measurement n Give consideration to related costs as well n EITF 08-1 n Expands SOP 97-2 to situations other than s/w

11. Intermediate Accounting I - Spring 2013 Long-Term Contracts

12. Intermediate Accounting I - Spring 2013 Long-term Contracts n Methodology n Entries n Key Accounts n Special Conditions

13. Intermediate Accounting I - Spring 2013 Key Accounts n Construction in progress-CIP n Billings (contra to CIP) n Cost of construction (similar to COGS)

14. Intermediate Accounting I - Spring 2013 Methodology n Percentage of completion n Completed contract n Disclose in Summary of Significant Accounting Policies

15. Intermediate Accounting I - Spring 2013 Percentage of Completion n Determine costs to date n Estimate total costs n Calculate gross profit estimate

16. Intermediate Accounting I - Spring 2013 Entries-I n For both methods: n Record construction costs (actual payments) n CIPXXX Cash, etc.XXX n Record progress billings (actual billings) n A/RXXX Billings (contra)XXX n Record cash receipts (actual cash) n CashXXX A/RXXX

17. Intermediate Accounting I - Spring 2013 Entries-II n For percentage of completion: n Record est. annual gross profit n CIPXXX Cost of constr.XXX RevenueXXX n Close out accounts n BillingsXXX CIPXXX

18. Intermediate Accounting I - Spring 2013 Entries-III n For completed contract: n Record total gross profit n CIPXXX Cost of constructionXXX RevenueXXX n Close out accounts n BillingsXXX CIPXXX

19. Intermediate Accounting I - Spring 2013 Special Conditions n Losses n Single period: change in accounting estimate n Period amount n Overall: change in accounting estimate n Total amount

20. Intermediate Accounting I - Spring 2013 Time Value of Money n On your own!!!

21. Intermediate Accounting I - Spring 2013 Cash and Receivables

22. Intermediate Accounting I - Spring 2013 Cash & Receivables n Cash n Receivables n Discounts & Returns n Notes Receivable

23. Intermediate Accounting I - Spring 2013 Cash n Most liquid asset n Focal point on internal controls n Segregation of duties n Cash equivalents--90 day rule n Bank reconciliation n Cash restrictions n Restricted cash n Compensating balances n Overdrafts

24. Intermediate Accounting I - Spring 2013 Bank Reconciliations n Balance per bank statement n Add: deposits in transit n Less: outstanding checks n Equals corrected balance n Adjust your checkbook to the corrected balance

25. Intermediate Accounting I - Spring 2013 Accounts Receivable n Value at net realizable value n Use the allowance for doubtful accts. n Cash discounts--gross or net n Gross is preferred due to simplicity A/Rxxx Salesxxx Cashxxx Sales discountxxx A/Rxxx A/R, netxxx Sales, netxxx Cashxxx A/Rxxx Interest Revenuexxx Gross Net

26. Intermediate Accounting I - Spring 2013 Sales Returns n Provide an allowance if material A/Rxxx Salesxxx COGSxxx Inventory Sales Returnsxxx A/Rxxx Inventoryxxx COGSxxx Sales Returnsxxx Allowance for Returnsxxx Invent.-Est.Rtnsxxx COGSxxx

27. Intermediate Accounting I - Spring 2013 Doubtful Accounts n Provide an allowance if material Bad Debt Exp.xxx Allowancexxx A/Rxxx Allowancexxx Cash xxx A/Rxxx Income Statement: % of Credit Sales Approach Balance Sheet: Aging Approach

28. Intermediate Accounting I - Spring 2013 Notes Receivable n Interest bearing…accrue interest n Non-interest bearing…discount interest n Use allowance to reflect bad debts

29. Intermediate Accounting I - Spring 2013 Financing Options n Assigning and pledging n Assigning requires recording of the transaction n Pledging requires disclosure n Factoring and securitization n With and without recourse n Securitization: purchase of A/R and resale as a security n Sales conditions: surrender of control n See Graphic 7-17

30. Intermediate Accounting I - Spring 2013 Discounting (transferring) the Note n Accrue interest at transfer date n Add interest to maturity n Deduct discount to determine cash n See Illustration 7-18 n Treat as sale or loan n Sale treatment is preferred n See Graphic 7-19

31. Intermediate Accounting I - Spring 2013 Monitoring A/R n Aging n DSO n Cash Conversion Cycle