Thursday, February 29, 2024
Wednesday, February 28, 2024
Tuesday, February 27, 2024
Accounting: The Language of Business - Vol. 2 (Intermediate: Part 128)
Accounting is more than just the act of keeping a list of debits and credits. It is the language of business and, by extension, of all things financial. Our senses collect information from our surroundings that our brains then interpret; accountants translate the complexities of finance into information that the public can understand (Investopedia.com).
Revenue Recognition (Part O)
by
Charles Lamson
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Recall from Part 127 that there are two accounting methods for revenue recognition for long-term contracts: the percentage-of-completion method and the completed-contract method. Total revenue and costs for a long-term contract are the same under both methods. The difference between the two approaches is the timing of revenue and gross profit recognition on the contract. The percentage-of-completion method recognizes gross profit over the production period whereas the completed-contract method recognizes gross profit only at the end of the contract. Firms can estimate the degree of completion by using input measures (for example, miles of highway and the number of cell towers installed), or engineering estimates. Input Measures. A common method used in practice, the cost-to-cost approach estimates the cumulative percentage of completion by dividing the total cost incurred to date by total estimated costs as follows: Cumulative Percentage Complete = Total Costs Incurred to Date / Estimated Total Cost of the Project (8.1) The estimated total cost of the project equals the total actual costs incurred to date plus the estimated costs to complete the project. The estimated total cost of the project is likely to change throughout the contract. This does not create a problem because the ratio is computed each period using the current costs to date and estimated total cost.  Output Measures. In addition to the cost-to-cost approach, which is an input measure of the degree of completion, firms also use output measures in practice. Output measure examples include miles of highway completed or square footage completed of a building. Example 8.22 illustrates the use of an output measure to estimate the percent completed. Percentage-of-Completion Method Accounting Procedures. As a company constructs an asset, it accumulates resources used in construction such as raw materials in an inventory account called construction in progress (CIP). Long-term construction contracts usually allow a company, also called a contractor, to bill the customer periodically over the contract term. When a company bills the customer, it increases accounts receivable with a debit. The credit is to an account called billings on construction in progress. Billings on construction in progress is a contra account to the construction-in-progress account and reduces the net carrying value of the asset in billings on CIP (accounts receivable). Using the contra account avoids double counting the total asset value. As discussed, revenue is based on the progress to date (that is, the percentage of the project that has been completed). Unique to accounting for long-term construction contracts, revenue from long-term contracts is credited, the construction costs account is debited, and the debit to the CIP account is the difference between the revenue and the construction cost (the gross profit). At the end of the project, the company removes the CIP account from the books with a credit and removes the billings on construction and progress account with a debit. At each balance sheet date, the company reports the balance of accounts receivable and the net amount of the CIP and billings on CIP. If the CIP amount is higher than the billings account, the net amount is an asset called costs and recognized profits in excess of billings. If, however, the amount in the billings account is higher than in the CIP account, then the net amount is a liability called billings in excess of costs and recognized profits.  The measurement of the net asset or net liability position of each contract has implications for financial statement users:
To summarize, the percentage-of-completion method involves the following accounting procedures:
 As discussed, the company estimates revenue on the contract based on progress toward completion. Example 8.22 illustrates the percentage of completion method showing all journal entries. %20(1)%20(1)%20(1)%20(1).jpg) %20(1)%20(1)%20(1)%20(2)%20(2)%20(1).jpg) %20(1)%20(1)%20(1)%20(3)%20(1)%20(1).jpg) %20(1)%20(1)%20(1)%20(3)%20(1)%20(2)%20(1)%20(1).jpg) %20(1)%20(1)%20(1)%20(3)%20(1)%20(2)%20(1)%20(3)%20(1)%20(1).jpg) %20(1)%20(1)%20(1)%20(3)%20(1)%20(2)%20(1)%20(3)%20(2)%20(1).jpg) %20(1)%20(1)%20(1)%20(3)%20(1)%20(2)%20(1)%20(3)%20(2)%20(2)%20(2)%20(1).jpg) *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 404-407* end |
Monday, February 26, 2024
Sunday, February 25, 2024
Saturday, February 24, 2024
Friday, February 23, 2024
Thursday, February 22, 2024
Wednesday, February 21, 2024
Tuesday, February 20, 2024
Accounting: The Language of Business - Vol. 2 (Intermediate: Part 127)
Importance of Ethics
It’s not all been plain-sailing for the accountancy profession. The 21st century has seen some dubious actions by accountants causing large-scale scandals. The Enron scandals in 2001 shook the accounting industry, for example. Arthur Andersen, one of the world’s largest accounting firms at the time, went out of business. Subsequently, under the newly introduced Sarbanes-Oxley Act, accountants now face harsher restrictions on their consulting engagements. Yet ironically, since Enron and the financial crisis in 2008, accountants have been greatly in demand, as corporate regulations have increased and more expertise is required to fulfil reporting requirements (https://yourfuture.accaglobal.com/).
Revenue Recognition (Part N)
by
Charles Lamson
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Accounting for Long-Term Contracts
Long-term contracts are a type of transaction for which firms report revenue, costs, and gross profit over time as opposed to at a point in time. They are prevalent in industries such as communications, home building, software development, aircraft, shipbuilding, and construction. Consider a company that enters into a contract to manufacture or build a product for the consumer when the manufacturing process will take a period of time substantially longer than a year. If the firm recognized revenue at a point in time, it would not recognize the revenue (and associated gross profit) attributable to the long-term contract until it completed the product and delivered it to the customer. However, as we discuss next, this approach may not provide the most accurate presentation of the company's financial position and economic performance. There are two accounting methods for revenue recognition for long-term contracts: the percentage-of-completion method and the completed-contract method. Total revenue and costs for a long-term contract are the same under both methods. The difference between the two approaches is the timing of revenue and gross profit recognition on the contract. The percentage-of-completion method recognizes gross profit over the production period whereas the completed-contract method recognizes gross profit only at the end of the contract. Recall from Part 125 that goods or services are transferred over time if the seller meets any one of the following three criteria:
An entity should use the percentage-of-completion method when it meets one of the three criteria for goods and services transferred over time, and it can reasonably measure its progress toward completion. If these conditions are met, the financial statements are more accurately presented under the percentage-of-completion method because the entity's economic activities are reported on the income statement. If the contract does not meet any of the three criteria or if the entity cannot reasonably measure progress toward completion, then it uses the completed-contract method. For example, General Electric Company will use the completed contract method to account for the revenue from the production of commercial airplane engines because contracts do not transfer control during the manufacturing process. We discuss each of these methods next.  %20(1)%20(1)%20(1)%20(1)%20(1)%20(1)%20(3)%20(1)%20(1)%20(1)%20(1)%20(1).jpg) Percentage-of-Completion Method In this section, we discuss accounting for contracts under the percentage-of-completion method. We begin with a discussion of estimating the percentage of completion of a long-term contract. Then, we explain the accounting procedures and introduce accounts specific to accounting for long-term contracts. Determining the Estimated Percentage of Completion. Firms can estimate the degree of completion by using input measures (for example, miles of highway and the number of cell towers installed), or engineering estimates.  Input Measures. A common method used in practice, the cost-to-cost approach estimates the cumulative percentage of completion by dividing the total cost incurred to date by total estimated costs as follows: Cumulative Percentage Complete = Total Costs Incurred to Date / Estimated Total Cost of the Project (8.1) The estimated total cost of the project equals the total actual costs incurred to date plus the estimated costs to complete the project. The estimated total cost of the project is likely to change throughout the contract. This does not create a problem because the ratio is computed each period using the current costs to date and estimated total cost. Determination of Revenue, Costs, and Gross Profit under the Percentage-of-Completion Method. Under the percentage-of-completion method, firms recognize revenues based on the project's stage of completion. Specifically, firms recognize revenue, cost, and gross profit in each year by:
 If the reported costs exceed the reported revenues in a given year for an otherwise profitable contract, then the gross profit is negative. In this case, the firm credits construction and progress in the journal entry made to record revenues, cost, and gross profit. Example 8.21 illustrates the computation of revenue and gross profit under the cost-to-date approach. %20(1)%20(1)%20(1)%20(1)%20(1)%20(1)%20(4)%20(1)%20(1).jpg) %20(1)%20(1)%20(1)%20(1)%20(1)%20(1)%20(4)%20(2)%20(1).jpg) %20(1)%20(1)%20(1)%20(1)%20(1)%20(1)%20(4)%20(3)%20(1)%20(1)%20(1).jpg)  *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 401-403* end |
Monday, February 19, 2024
Sunday, February 18, 2024
Jesus was tempted by Satan.
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Jesus was led by the Spirit into the desert, to be tempted by the devil. He fasted for forty days and forty nights, after which he was hungry. |
Saturday, February 17, 2024
Accounting: The Language of Business - Vol. 2 (Intermediate: Part 126)
By the mid-1800s, the industrial revolution in Britain was well underway and London was the financial centre of the world. With the growth of the limited liability company and large-scale manufacturing and logistics, demand surged for more technically proficient accountants capable of handling the growingly complex world of global transactions (yourfuture.accaglobal.com).
Revenue Recognition (Part M)
by
Charles Lamson
.jpg) |
Recall from Exhibit 8.1 from Part 114 and reintroduced below, the five steps in revenue recognition.
For a more in-depth review of the five steps, consult the following table and click on the links provided.
%20(1)%20(1).jpg)
.jpg) Example 8.20 summarizes the five-step revenue recognition process with a comprehensive illustration. %20(1)%20(1)%20(1)%20(1)%20(1)%20(1)%20(2)%20(1).jpg) %20(1)%20(2)%20(1)%20(1).jpg) %20(1)%20(3)%20(1)%20(1).jpg) %20(1)%20(3)%20(2)%20(2).jpg) %20(1)%20(3)%20(2)%20(3)%20(1)%20(1).jpg) %20(1)%20(3)%20(2)%20(3)%20(2)%20(1).jpg) %20(1)%20(3)%20(2)%20(3)%20(3)%20(1)%20(1)%20(1)%20(1).jpg) %20(1)%20(3)%20(2)%20(3)%20(4)%20(2)%20(1).jpg) %20(1)%20(3)%20(2)%20(3)%20(5)%20(1).jpg) %20(1)%20(3)%20(2)%20(3)%20(6)%20(1).jpg) *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 397-401* END |
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Measurement Methods by Charles Lamson There are two major measurement methods: counting and judging. While counting is preferre...
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Product Life Cycles by Charles Lamson Marketers theorize that just as humans pass through stages in life from infancy to death,...
