Class Revenue

8/12/2019 Class Revenue

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Revenue Recognition

MANAC I


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Issues involved

When to recognize?

Timing

How much to recognize?

Amount


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Determinants

Operating Cycle

Accounting System

Accrual accounting system

AS 1

Realization, Conservatism, Matching

Concepts


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Readings

Accounting Standard 9

HBS-Revenue Recognition and Reporting

AHM Chapter 5


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What is revenue?

All the receipts are not revenue

It is the gross inflow of cash, receivables or

other considerations arising in the ordinary

course of business

It is charge made to customers


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Revenue

Sale of goods

Services

OthersInterest, Royalties and dividends

Note: Assume that company follow Accrual Accounting System


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AS9 - Does not include revenue from Construction contracts (AS 7)

Hire-purchase and lease agreements (AS 19)

Government grants and subsidies (AS 12)

Insurance contracts (partly AS 30, 31)

Changes in foreign exchange rates (AS 11)


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Revenue Recognition Methods

1. Sales

2. Installment Sales

3. Production

4. Long-term contracts I

5. Long-term contracts II

6.

Cost recovery7. Delivery


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1. Sales Methodrecognition at the time

services are rendered or goods shipped

2. Installment Sales Methodrecognition at

the time the sale price is collected

3. Production Methodrecognition at the

time the product is completed but before

delivery


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4. Percentage-of-completion methodrecognition proportionally over the

performance of a long-term contract

5. Completed contract methodrecognition

at the completion of a long-term contract

6. Cost recovery methodrecognition after

the buyers cumulative cash payments

exceed the sellers total costs 7. Delivery methodrecognition at time of

delivery if the sale is made and cash is

received prior to delivery or production


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Event Revenue Recognition Revenue

at this time Recognition Method

1 Sales order received NO NONE2 Deposit or advance payment received NO NONE

3 Goods are produced For certain long-term contracts Percentage of completion

4 Production completed; goods stored For precious metals and certain Production

agrrcultural products5 Goods shipped or services provided Usualy Delivery

6 Customer pays account receivable Collection is uncertain Installment

Timing of Revenue Recognition


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Services

When service is performed

Proportionate completion method

Multiple acts

Completed service contract

Single acts


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Others

Interestdue but not received

Royaltiesaccrue and either paid or due

Dividendsright to receive payment is

established


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Format

Turnover (Gross) XXX

Less: Excise Duty XX

Turnover (Net) XXX


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Cash and Trade Discounts

Trade discountsreductions to the gross

selling price for a particular class of

customers

Cash discountsreductions of invoice prices

awarded for prompt payment


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Cash and Trade discount

Credit terms Meaning

n/30 The full billed price (net price) is ude on thirtieth day after the invoice date

1/5, n/30 A 1% discount can be taken for payment within 5 days of the invoice date;

othewise, the full billed price is due in 30 days

15 E.O.M. The full price is due within 15 days after the End Of the Monthof salean invoice dated January 20 is due February 15


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Illustration .. A manufacturer sells 30000 of computer

equipment to IBM on terms 2/10, n/60

Ans..

IBM may remit 30000 less a cash discount of0.02 X 30000 and pay 29400, if it makes

payment within 10 days after the invoice date

Otherwise it must pay the full 30000 within 60days

WHAT IS THE ENTRY FOR THIS


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Transaction analysis or Journal entries

1. Accounts receivablesDr30000 and

SalesCr30000

2. CashDr29400; Cash discounts on sales

Dr600 and Accounts receivablesCr30000

OR

1. CashDr30000 and Accountsreceivables - 30000


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Question to think / discuss


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Sale of goods

Delivery is delayed at buyers request and

buyer takes title and accepts billing


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Sale of goods

What is delivery subject to conditions ?

Installation and inspection

On approval

Guaranteed sales

Provide allowance for the same

Consignment sales Cash on Delivery


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HUL AR 2008-09 page 112


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Infosys AR 2007-08 page 73


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Jindal Steel and Power AR-2007-08


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AXIS bank AR-2007-08


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Cost of Sales and Inventory

:


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Issues involved

What is inventory?

What costs are included in inventory?

How do we separate CGOS and closing

inventory?


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Resources

AS 2

AS-2 deals with determination of value of

inventory

HBR-The Question of LIFO and FIFO

AHM Chapter 6


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What is inventory?

Asset items held for sale in the ordinary

course of business or goods that will be used

or consumed in the production of goods to be

sold


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Types of Companies

Merchandising company

Sells goods in same form as acquired.

Manufacturing company

Converts raw material into finished goods.

Service company Provides intangible services.


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Merchandising company

Merchandising

Sells goods in same form in which they are

acquired.

Inventory costs (and costs of goods sold) =acquisition costs.


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Manufacturing company

Manufacturing company converts raw

materials and purchased parts into finished

goods.

3 types of inventories; Raw Materials.

Work-in-process.

Finished goods.


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Service company

Service organizations (hotels, beauty parlors,

plumbers)

May have materials inventories.


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Professional Service Inventories

Professional service firms (accounting firms,

legal firms)

Intangible inventory costs are costs incurred for

client but not yet billed called jobs-in-progress orunbilled costs.

Example: law and accounting firms.

Labor , overhead, and incidental product costs but nomaterials cost.

Expensed in period billed (i.e., when revenues are

recognized).


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Terminology

Inventories: are assets

a. held for sale in the ordinary course of business

b. in the process of production for such sale

c. in the form of materials or supplies to beconsumed in the production process or in the

rendering of services

Net Realizable Value:


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Measurement

Inventories should be valued at the lower of

cost and net realizable value (as per AS 2)


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Cost Formulas

FIFO

LIFO

Weighted Average

Average


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Inventory valuation Method


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What is the value of inventory? Under

. FIFO

LIFO

Average

Weighted Average


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What is the value of inventory? Under

. FIFO 4500

LIFO 3800

Average 4141

Weighted Average


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Question to all?

The Question of LIFO or FIFO: Which is

Preferable?

Ans: . . .


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Answer this .

Sales 100000

Less: Cost of goods sold

Op inventory 20000

Purchases 30000

Cost of goods available 50000

Less: Cl. Inventory 14000Cost of goods sold 36000

Gross Profit 64000

Operating Exp 29000

Net Income 35000

If Cl inventory is overstated by 2000

What is the impact on

a. Cost of goods sold

b. Net income


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Advantages for LIFO

If prices are based on current costs, results in

best matching of revenues and costs and

therefore most useful income statement.

Closest to reflecting current or replacementcosts of goods sold.

However, it is still historical costs and could differ

from current costs


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Relationship of Inventory and Cost of

Goods Sold

Beginning inventory + net purchases = goods

available for sale

Goods available for sale = cost of goods sold

+ ending inventory. Equivalently: Beg. inventory + net purchases

-ending inventory = cost of goods sold.

Net purchases = gross purchases -purchasereturns and allowances + freight-in


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Calculate value of inventory for reporting in

Financial Statementson ITEM by ITEM

Item Units Cost per unit NRV per unit

Z 200 4.00 4.50Y 250 5.00 5.50

X 300 6.00 5.00

W 350 7.00 6.00


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Calculate value of inventory for reporting in

Financial Statementson ITEM by ITEM

Lower of

Item Units Cost per unit NRV per unit Cost or MV

Z 200 4.00 4.50 800 COSTY 250 5.00 5.50 1250 COST

X 300 6.00 5.00 1500 MV

W 350 7.00 6.00 2100 MV

5650 total

l l l f f


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Calculate value of inventory for reporting in FS

onTOTAL INVENTORY basis

Item Units Cost per unit NRV per unit COST MV

Z 200 4.00 4.50 800 900

Y 250 5.00 5.50 1250 1375

X 300 6.00 5.00 1800 1500

W 350 7.00 6.00 2450 2100

6300 5875


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Why lower of cost or market price

Market price may be below cost due to:

Physical deterioration.

Change in consumer tastes.

Technological obsolescence.

LCM is a reflection of conservatism concept.

Market is defined as replacement cost.


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AS - 2

In India, as per AS 2Valuation of

Inventories,

the cost of inventories should be assigned by

using First-in, First out (FIFO) method or

Weighted Average Cost of method


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Disclosure Requirements

The financial statements should disclose:

a. the accounting policies adopted in measuring

inventories, including the cost formula used and

b. the total carrying amount of inventories and itsclassification appropriate to the enterprise

Like: raw materials and components, work in progress,

finished goods, stores and spares and loose tools.

d l A


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Jindal AR- 2007-08

f A 200 08


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Infosys AR 2007-08

Inventory value will be.

?

I f AR 2007 08 64


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Infosys AR 2007-08 page no. 64

TCS AR 2010 11


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TCS AR2010-11

Inventoryas a part of CA (Scheduled H)


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HUL AR 2008 09 64


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HUL AR- 2008-09 page no. 64

R i


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Revise ..

1. Inventory is reported in the Balance Sheet as

an ___________

2. The inventory method which assumes thatgoods are sold in the reverse order of their

acquisition is know as ________ method

3. A company should select the ____ inventory

method if it wishes to keep its taxes to

minimum

R i


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Revise ..

1. Inventory is reported in the Balance Sheet as

an_CURRENT ASSET

2. The inventory method which assumes thatgoods are sold in the reverse order of their

acquisition is know as_LIFO_ method

3. A company should select the_LIFO_inventory

method if it wishes to keep its taxes to

minimum

Documents

Class Revenue