Chapitre 7: examen (document en anglais)

CHAPTER 07 REVIEW

1. One of the most difficult issues facing accountants concerns the recognition of revenue by a business organization. Although general rules and guidelines exist, the significant variety of marketing methods for products and services make it difficult to apply 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 have been performed and are billable.

c. Revenue from permitting others to use enterprise assets, such as interest, rent, and royalties, is recognized as time passes or as the assets are used.

d. Revenue from disposing of assets other than products is recognized at the date of sale.

Point of Sale

4. (L.O. 2) Sales transactions result in the exchange of products or services of an enterprise for other valuable assets, normally cash or a promise of cash in the future.

Although most sales transactions are fundamentally similar, differences in the method or terms of sale lead to real differences in the transactions themselves and thus to differences in the appropriate accounting for them.

5. The discussion of sales transactions in the chapter is primarily focused on product sales transactions.

The coverage of product sales transactions is further divided into the following

topics:

(a) revenue recognition at point of sale (delivery),

(b) revenue recognition before delivery,

(c) revenue recognition after delivery, and

(d) revenue recognition for special sales transactions.

The accounting principles and methods related to product sales transactions are fairly well developed in the accounting literature. Service sales transactions have recently received attention from AcSEC and the FASB. These efforts are an attempt to develop accounting theory and methodology related to service transactions as distinct from product transactions.

6. According to the FASB, revenue is recognized when the product is delivered or the service is rendered. This time of recognition is normally at the time of sale when the product or service is delivered to the customer. Some problems in implementing these basic principles arise when (a) sales have buyback agreements, (b) the right of return exists, and (c) trade loading or channel stuffing is present.

7. In most business enterprises, a far greater proportion of total sales volume is handled on a credit basis than on an ordinary cash sale basis. In situations where the seller gives the buyer the right to return the product, the FASB concluded that the transactions should not be recognized currently as sales unless all of the following six conditions are met:

a. The seller’s price to the buyer is substantially fixed or determinable at the date of sale.

b. The buyer has paid the seller, or the buyer is obligated to pay and the obligation is not

contingent on resale of the product.

c. The buyer’s obligation to the seller would not be changed in the event of theft or

physical destruction or damage of the product.

d. The buyer has economic substance apart from that provided by the seller.

e. The seller does not have significant future performance obligations to directly bring

about the resale of the product by the buyer.

f. The amount of future returns can be reasonably estimated.

8. Even when revenues are recorded at date of delivery, with neither buyback or return

provisions, some companies are recognizing revenues and earnings prematurely. This

occurs in situations where trade loading or channel stuffing are present.

Trade loading is an attempt to show sales, profits, and market share an entity does not have by inducing wholesale customers to buy more product then they can promptly sell. Channel stuffing is a similar tactic found mostly in the computer software industry. In channel stuffing, the software maker offers deep discounts to its distributors to overbuy and records revenue when the software leaves its loading dock. When this process takes place, the distributors’ inventories become bloated and the marketing channel gets stuffed, but the software maker’s financial statements are improved.

Long-term Contracts

9. In most circumstances,

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