...exists. b8.Appropriate accounting method for long-term contracts. c9.Percentage-of-completion method. b10.Percentage-of-completion method. c11.Classification of progress billings and construction in process. b12.Calculation of gross profit using percentage-of-completion. a13.Disclosure of earned but unbilled revenues. c14.Revenue, cost, and gross profit under completed contract. b15.Disadvantage of using percentage-of-completion. a16.Loss recognition on a long-term contract. c17.Accounting for long-term contract losses. d18.Criteria for revenue recognition of completion of production. a19.Completion-of-production basis. c20.Presentation of deferred gross profit. c21.Appropriate use of the installment-sales method. b22.Valuing repossessed assets. b23.Gross profit deferred under the installment-sales method. b24.Income recognition under the cost-recovery method. b25.Income recognition under the cost-recovery method. d26.Cost recovery basis of revenue recognition. d*27.Allocation of initial franchise fee. a*28Recognition of continuing franchise fees. b*29.Future bargain purchase option. a*30.Option to purchase franchisee's business agreement. d*31.Revenue recognition by the consignor. MULTIPLE CHOICE—Computational AnswerNo.Description c32.Percentage-of-completion method. c33.Percentage-of-completion method. b34.Determine cash collected on long-term construction...
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...BA2_C15.qxd 9/3/05 4:25 pm Page 264 chapter 15 Contract accounts Learning objectives After you have studied this chapter, you should be able to: l describe the factors that are involved in accounting for contracts l describe how accounting records of contracts are maintained l explain the need to apply prudence when assessing profit or loss on a contract that is still in progress l describe some of the requirements of SSAP 9 relating to long-term contracts Introduction In this chapter you’ll learn how to record revenues and expenditures arising on contracts in contract accounts and how to estimate profits and losses on long-term contracts so that appropriate entries may be included in the financial statements for internal use. 15.1 Financial statements and the business cycle The span of production differs between businesses, and some fit into the normal pattern of annual financial statements more easily than others. A farmer’s financial statements are usually admirably suited to the yearly pattern, as the goods they produce are in accordance with the seasons, and therefore repeat themselves annually. With a firm whose production span is a day or two, the annual financial statements are also quite suitable. On the other hand, there are businesses whose work does not fit neatly with a financial year’s calculation of profits. Assume that a firm of contractors has only one contract in progress, the construction of a large oil refinery complex...
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... F 6. Use of percentage-of-completion method. T 7. Input measure for contract progress. T 8. Reporting Construction in Process and Billings on Construction in Process. F 9. Construction in Process account balance. F 10. Recognition of revenue under completed-contract method. T 11. Principal advantage of completed-contract method. F 12. Recognizing loss on an unprofitable contract. F 13. Recognizing current period loss on a profitable contract. T 14. Recognizing revenue under completion-of-production basis. F 15. Recording a loss on an unprofitable contract. F 16. Deferring revenue under installment-sales method. T 17. Deferring gross profit under installment-sales method. T 18. Classification of deferred gross profit. F 19. Recognizing revenue under cost-recovery method. T 20. Recognizing profit under cost-recovery method. Multiple Choice—Conceptual Answer No. Description c 21. Revenue recognition principle. b 22. Definition of "realized." a 23. Definition of "earned." b S24. Revenue recognition representations. d P25. Definition of recognition. b P26. Revenue recognition principle. d 27. Recognizing revenue at point of sale. d 28. Recording sales when right of return exists. c 29. Revenue recognition when right of return exists. d 30. Revenue recognition when right of return exists. b 31. Appropriate accounting method for long-term contracts. c 32. Percentage-of-completion method. b 33. Percentage-of-completion...
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...the rules consistently in all situations. Chapter 7 is devoted to a discussion and illustration of revenue transactions that result from the sale of products and the rendering of services. Throughout the discussion, attention is focused on the theory behind the accounting methods used to recognize revenue. Revenue transactions that result from leasing and the sale of assets other than inventory are discussed in other sections of the text. *Note: All asterisked (*) items relate to material contained in the Appendix to the chapter. Revenue Recognition 2. (L.O. 1) The revenue recognition principle provides that revenue is recognized when (1) it is realized or realizable, and (2) it is earned. Revenues are realized when goods and services are exchanged for cash or claims to cash (receivables). Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, that is, when the earnings process is complete or virtually complete. 3. The conceptual nature of revenue as well as the basis of accounting for revenue transactions are described in the following four statements. a. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers. b. Revenue from services rendered is recognized when services...
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...illustrate financial statements prepared under the FRF for SMEsTM accounting framework. Also included are sample financial statements based on accounting principles generally accepted in the United States of America (U.S. GAAP). During the AICPA staff’s outreach efforts related to the FRF for SMEsTM accounting framework, users of financial statements and other stakeholders asked for comparisons of financial statements prepared under the framework to those prepared under U.S. GAAP. These are presented for comparative purposes. These sample financial statements are included for illustrative purposes and are not intended to establish reporting requirements. Furthermore, the dollar amounts shown are illustrative only and are not intended to indicate any customary relationship among accounts. The sample financial statements do not include all of the accounts and transactions that might be found in practice. The notes indicate the subject matter generally required to be disclosed, but should be expanded, reduced, or modified to suit individual circumstances and materiality considerations. In the following illustrative financial statements based on the FRF for SMEs accounting framework, it is presumed that the management of Alpha Contractors Inc. and subsidiary evaluated the financial reporting needs and responsibilities of their businesses and determined that the FRF for SMEs accounting framework was a suitable accounting option to use in the preparation of their financial statements. ...
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...3, 4, 5, 6, 22 1 1, 2, 3 1 1, 2, 3, 4, 5, 7, 8, 9 *2. Long-term contracts. 7, 8, 9, 10, 11, 12, 22 2, 3, 4, 5, 6 4, 5, 6, 7, 8, 9, 10 1, 2, 3, 4, 5, 6, 7, 14, 15, 16, 17 1, 2, 3, 6 *3. Installment sales. 13, 14, 15, 16, 17, 18, 19, 20, 21, 22 7, 8, 9 11, 12, 13, 14, 15, 16 1, 8, 9, 10, 11, 12, 15 1, 2, 3 *4. Repossessions on installment sales. 8 13, 17, 18 10, 11, 12, 13, 14 *5. Cost-recovery method; deposit method. 13, 22, 23, 24 10 15, 16 8, 9 *6. Franchising. 22, 25, 26, 27, 28 11 19, 20 10 *7. Consignments. 29 12 21 *This material is dealt with in an Appendix to the chapter. ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Brief Exercises Exercises Problems 1. Apply the revenue recognition principle. 1 1, 2, 3 2. Describe accounting issues for revenue recognition at point of sale. 1 1, 2, 3 1 3. Apply the percentage-of-completion method for long-term contracts. 2, 3 4, 5, 6, 7, 8, 9 1, 2, 3, 4, 5, 6, 7, 16, 17 4. Apply the completed-contract method for long-term contracts. 4, 5 4, 8, 9, 10 1, 2, 3, 5, 6, 7, 15, 16, 17 5. Identify the proper accounting for losses on long-term contracts. 6 10 5, 6, 7, 15 6. Describe the installment-sales method of accounting. 7, 8, 9 11, 12, 13, 14, 15, 16, 17, 18 1, 8, 9, 10, 11, 12, 13, 14 7. Explain the cost-recovery method of accounting. 10 15, 16 *8. Explain revenue recognition for franchises and...
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...meaning of “creative accounting” and “earnings management”. Earnings management defines as the choice by a manager of accounting policies or real actions that affecting earnings, in order to achieve some specific reported earnings objective. Earnings management includes both accounting policy choice and real actions. There are two categories of accounting policies which are the choice of accounting policies per se and the discretionary accruals. One is the choice of accounting policies per se such as straight line versus declining balance amortization or policies for revenue recognition. Meanwhile, the other category is discretionary accruals such as provisions for credit losses, warranty costs, inventory values and timing and amounts of non-recurring and extraordinary items such as write offs and provisions for reorganization. There is an “iron law” surrounding accruals based earnings management which will be familiar from introductory accounting. Creative accounting refers to the use of accounting knowledge to influence the reported figures, while remaining within the jurisdiction of accounting rules and law, so that instead of showing the actual performance or position of the company, they reflect what the management wants to tell the stakeholders. 2. i) Describe the “good” and the “bad” sides of earnings management. Good sides of earnings management relates to efficient contracting. When a contract imposes strict or incomplete terms on a manger, earnings...
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...they are able to purchase crops at a guaranteed price and quantity, hence protecting the cash flow and operating income of the business. I have come up with three hedging options that would be best suited for Thomas Foods, the pros and cons of each, and included information regarding the accounting for these options as well as the guidance given by FASB. Hedging options that Thomas Foods has to mitigate the risk of paying more for harvested crops include: -Future contracts which are contractual agreements, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. So we can negotiate price now with our farmers on the prices that we will pay for the crops in the future and that price will be locked in. ("Futures Contract Definition | Investopedia," n.d.) -Forward contracts which are contracts that are customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging. Unlike standard futures contracts, a forward contract can be customized to any commodity, amount and delivery date. These are not as customizable as future contacts and even if the prices of crops...
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...as: (1) Finished goods; (2) inventoried costs relating to long-term contracts or programs (see (d) below and § 210.4–05); (3) work in process (see § 210.4–05); (4) raw materials; and (5) supplies. o If the method of calculating a LIFO inventory does not allow for the practical determination of amounts assigned to major classes of inventory, the amounts of those classes may be stated under cost flow assumptions other that LIFO with the excess of such total amount over the aggregate LIFO amount shown as a deduction to arrive at the amount of the LIFO inventory. o (b) The basis of determining the amounts shall be stated. o If cost is used to determine any portion of the inventory amounts, the description of this method shall include the nature of the cost elements included in inventory. Elements of cost include, among other items, retained costs representing the excess of manufacturing or production costs over the amounts charged to cost of sales or delivered or in-process units, initial tooling or other deferred startup costs, or general and administrative costs. o The method by which amounts are removed from inventory (e. g., average cost, first-in, first-out, last-in, first-out, estimated average cost per unit) shall be described. If the estimated average cost per unit is used as a basis to determine amounts removed from inventory under a total program or similar basis of accounting, the principal assumptions (including, where meaningful, the aggregate...
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...Necessity Differentiate between a positive and normative accounting theory * Positive Theory seeks to explain and predict particular phenomena * Focuses on relationships between various individuals and how accounting is used to assist in the functioning of these relationships * Normative Theory prescribe how a particular practice should be undertaken Identify the origins of Positive Accounting Theory (PAT) * Assumption: All individual action is driven by self-interest opportunistic behaviour increase wealth does not incorporate notions of loyalty or morality * 1960s: paradigm shift from normative theories * Efficient Markets Hypothesis: capital markets react in an efficient and unbiased manner to publicly available information * Ball & Brown paper: investigated stock market reaction to accounting earnings announcements crucial to the acceptance of the positive research paradigm * Agency theory: explained why the selection of particular accounting method might matter focus: relationship between principals and agents information asymmetries create much uncertainty acceptance of transaction costs and information costs * Relies on traditional economics literature assumptions of self-interest and wealth maximization without having contractual agreements between the agents and the principal the agent will receive a reduced income agents then motivated to enter contracts which appear to limit actions detrimental to agents agency...
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...relation to revenue recognition: 6 Part 3- Issues raised that may impact SoftWarehouse Ltd: 7 Part 4 - Future changes in revenue recognition standard: 8 Conclusion: 9 Reference List: 10 Executive Summary: This report has been prepared for the Board of Directors of SoftWarehouse Ltd for elucidation about the contentious issues that have given rise to the publication of the article concerning Isoft’s issues with revenue recognition. Finally, it will also assess whether or not these issues are likely to affect SoftWarehouse Ltd. In January 2006, Isoft, a Manchester based supplier of software applications for the healthcare sector, announced that its profit would be below market expectations due to a required change in its accounting policy for revenue recognition. Isoft was forced to reverse revenue of approximately £70m in 2005 and £55m in 2004 – when Deloitte found that Isoft was recognizing revenue sooner than it should have been. The underlying principle of Isoft’s historic revenue recognition policy had been that the value of the product licenses was recognised at the time of delivery, while the value of support and servicers was recognised as they were performed. Moreover, the value of licences was identifiable and separable form the...
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...owners, Synamex Effects Limited From: CGA, Controller, Synamex Effects Limited Date: March 16, 2015 Re: Current risks and issues of Synamex Effects Limited As per your request, I have presented my thoughts and suggestions on the current risks and issues of SEL, the three accounting packages, and the key steps required for initial public offering (IPO). Current risks and issues of SEL Foreign exchange risk The sales in the U.S. market segment have been growing and accounted for 25% of total revenue. In addition, the recent contract with the Los Angeles studio is chosen to purchase some of the materials in California, which has exposed SEL to foreign exchange risk. This risk could be eliminated by using natural hedging with purchases from U.S. suppliers. It could be mitigated by using hedging strategies, such as swaps, forwards and options. Financial management issue As owners, I understand the importancy of developing new ideas and testing prototypes, which are considered to be part of SEL’s competitive advange. However, it is also crucial to focus on financial management and to engage on long-term strategies to emphasize on the going-concern. Contract pricing issue The three contracts accepted earlier this year suggest the current pricing scheme does not provide sufficient revenue to cover the relevent expenses. Project cost management is critical to serve as a basis to measure cost and productivity of each project. Therefore, the IT systems should implement...
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...Chapter 3 Outline 300 Introduction – pg. 87 Tax accounting – the official reporting of income and expenses so a taxpayer’s taxable income for a particular period can be determined - The rules for determining when a business must recognize income and when it may deduct expense are referred to as the taxpayers method of accounting 301 Tax Accounting Distinguished from Financial Accounting - two sets of books because two different governing bodies Financial accounting – intended to provide useful information about a business so that management, owners, potential investors, creditors and other interested parties can make well informed investment, credit and other decisions - must prepare according to GAAP - accrual method – events reported in the accounting period in which they are earned or incurred rather than when its paid or received Tax accounting records – focuses on items of income and expense that are important for determining taxable income For external (financial) reporting – GAAP allows a business to choose among various acceptable accounting methods - management interested in making business look successful and thriving Tax accounting – goal is to pay least amount of taxes as legally possible Accounting Periods – pg. 89 - tax year – period of time taxpayers use to calculate taxable income o may or may not be the same as the annual accounting period used for financial reporting purposes o no constitutional requirement that income be calculated...
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...Course: Financial Accounting Theme 1: "Accounting for leases – Financial versus Operational Leases impacts on financial statements and on financial analysis." "Accounting for leases – Financial versus Operational Leases - impacts on financial statements and on financial analysis" A lease is a contractual agreement between two parties for the hire of an asset. The lessee – user of the asset – will pay a lease rent to the lessor – owner of the asset – to be able to use it during a certain period. At the end of the lease the asset is returned to the lessor. A lease is then just another source of capital and firms may find them preferred solutions to buying for a variety of reasons. First, the lessor may have access to cheaper capital on the markets and be able to pass on past of the resultant savings to the lessee. Then, leases normally involve smaller transaction costs than bonded debts and may offer more flexible contract terms. Additionally, there are normally tax benefits associated. A particular situation where leases may be of great help is when trying to setup new businesses. The budget is usually tight and the access to capital markets more difficult and expensive than for well established companies. In this situation, leasing allows to avoid heavy upfront costs and obtain more equipment sooner. It may be even possible to defer payment for a while and give the company opportunity to put business running smoothly before getting into heavier expenses. All leases...
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...Canadian Center of Science and Education A Proposed Model for Accounting Treatment of Ijarah Muhannad A. Atmeh1 & Jamal Abu Serdaneh2 1 TAG Graduate School of Business Administration, German Jordanian University, Amman, Jordan 2 Faculty of Business Studies, Arab Open University – Jordan Branch, Amman, Jordan Correspondence: Muhannad A. Atmeh, TAG Graduate School of Business Administration, Mecca Street, P.O. Box 921951, Amman 11192, Jordan. Tel: 962-7-950-1220. E-mail: muhannad.atmeh@gju.edu.jo Received: May 22, 2012 doi:10.5539/ijbm.v7n18p49 Accepted: June 20, 2012 Online Published: September 16, 2012 URL: http://dx.doi.org/10.5539/ijbm.v7n18p49 Abstract Islamic banks use finance leases as a mode of financing, after incorporating major alterations in the structure of the contract in order to meet Shariah principles. In this case, the contract is called ‘Ijarah Muntahia Bittamleek’. As different structures might lead to different accounting results, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) issued Financial Accounting Standards to tackle the accounting treatment for such transactions. The paper criticised the accounting treatment offered by AAOIFI for violating the matching principle and lacking faithful representation. Suggested amendments for accounting treatments are also proposed. Keywords: Ijarah, lease, Islamic accounting, Accounting and Auditing Organization for Islamic Financial Institutions...
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