CH 4 Financial Acc II. Abaarso Tech University

COURSE : FINANCIAL ACCOUNTING II
Instructor: Abdihakim Tiyari ( BA, MBA)

Credit Hour: 4 hrs
Revenue Revenue Revenue
Current
Recognition at the Recognition before Recognition after
Environment
Point of Sale Delivery Delivery
Guidelines for Sales with Percentage-of- Installment-sales

revenue buyback completion method
recognition agreements method Cost-recovery
Departures from Sales when right Completed- method
sale basis of return exists contract method
Trade loading Long-term
and channel contract losses
stuffing Disclosures
Completion-of-
production basis
 Revenues
◦ Inflows of assets or settlements of liabilities during a
period from delivering or producing goods or
services.
 Expenses
◦ Outflows of assets or incurrence of liabilities during a
period from delivering or producing goods or
services.
 Incurred in an attempt to produce revenues

 Revenue should be recognized in the financial
statement when . . .
 It is earned, and
 It is realized or realizable
(Measurable)
Revenue is typically recognized:
 At delivery (point of sale)

 After delivery
 Before delivery
of product or service
 Revenue is earned and realized at the point
of sale.
 The product or service has been delivered

to the customer and cash has been
received or is receivable.
 This method is sometimes called the “sales

method,” or “delivery method.”
Departures from the Sale Basis
FASB’s Concepts Statement No. 5, companies usually meet the

two conditions for recognizing revenue by the time they deliver
products or render services to customers.
Implementation problems,
 Sales with Buyback Agreements
 Sales When Right of Return Exists
 Trade Loading and Channel Stuffing
LO 2 Describe accounting issues for revenue recognition at point of sale.

 Uncertainties about collectibility or future
performance by seller.
 Sale with right of return.
 Product-financing arrangements.
 When we are uncertain about the collectability
of the sales revenue or the ability of the seller
to deliver futures services, we should defer
revenue recognition.
 Two commonly used accounting methods are

the . . .
◦ Installment sales method.
◦ Cost recovery method.
Sam’s Appliances made sales of $200,000 in
19X5 that qualified for the installment sales
method of accounting. The items sold have
a cost to Sam’s of $130,000. During 19X5,
Sam’s collected cash from installment
customers of $90,000. The remaining
amount will be collected in 19X6.
Prepare the journal entries to record the

installment sales transactions during 19X5.
Sam's Appliances
Installment Sales
Dollars Percent
Installment sales revenue $ 200,000 100%
Cost of goods sold 130,000 65%
Gross margin $ 70,000 35%
 Like the installment sales method, cost
recovery is used when we are uncertain
about the collectibility of the sales revenue
or the ability of the seller to complete future
performance.
UNCERTAINTY IS GREATER!
 No profit is recognized until cost of item
sold is fully recovered.
Part two
11/26/21 14
 Accounting for long-term construction
contracts
◦ Completed-Contract Method
◦ Percentage-of-Completion Method
Percentage-of-Completion Method
Formula for Total Revenue to Be Recognized to Date
Illustration 4-3
Illustration 4-4
Illustration 4-5
LO 3 Apply the percentage-of-completion method for long-term contracts.

Illustration: KC Construction Company has a contract to construct
a $4,500,000 bridge at an estimated cost of $4,000,000. The
contract is to start in July 2010, and the bridge is to be completed in
October 2012. The following data pertain to the construction period.

Illustration: Compute percentage complete.
Illustration 4-6

Completed Contract Method
Companies recognize revenue and gross profit only at point of sale—

that is, when the contract is completed.
Under this method, companies accumulate costs of long-term contracts

in process, but they make no interim charges or credits to income
statement accounts for revenues, costs, or gross profit.
LO 4 Apply the completed-contract method for long-term contracts.

Direct
Period
Allocated

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COURSE : FINANCIAL ACCOUNTING II

Instructor: Abdihakim Tiyari ( BA, MBA)

Guidelines for Sales with Percentage-of- Installment-sales

 Incurred in an attempt to produce revenues

 At delivery (point of sale)

 The product or service has been delivered

 This method is sometimes called the “sales

FASB’s Concepts Statement No. 5, companies usually meet the

LO 2 Describe accounting issues for revenue recognition at point of sale.

 Sale with right of return.

 Two commonly used accounting methods are

Prepare the journal entries to record the

Formula for Total Revenue to Be Recognized to Date

LO 3 Apply the percentage-of-completion method for long-term contracts.

LO 3 Apply the percentage-of-completion method for long-term contracts.

LO 3 Apply the percentage-of-completion method for long-term contracts.

Companies recognize revenue and gross profit only at point of sale—

Under this method, companies accumulate costs of long-term contracts

LO 4 Apply the completed-contract method for long-term contracts.

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