Revenue Recognition
What are the five steps in the revenue recognition model?
Identify the contract, identify performance obligations, determine the transaction price, allocate the price, recognize revenue when obligations are satisfied.
What principle guides when expenses should be recorded?
The matching principle.
What is the formula for Cost of Goods Sold?
Beginning Inventory + Purchases – Ending Inventory.
What does FIFO stand for?
First-In, First-Out.
What are two main methods of accounting for bad debts?
Direct write-off and allowance method.
When is revenue recognized for goods shipped FOB shipping point?
When the goods leave the seller’s premises.
When should an expense be recognized under accrual accounting?
When it is incurred, not necessarily when cash is paid.
What is the effect of overstating ending inventory?
Net income is overstated.
What does LIFO stand for?
Last-In, First-Out.
Which method is GAAP-compliant?
The allowance method.
When is revenue recognized for goods shipped FOB destination?
When the goods arrive at the buyer’s location.
Give an example of a deferred expense.
Prepaid insurance or prepaid rent.
Under a perpetual system, when is COGS recorded?
At the time of each sale.
When prices are rising, which inventory method results in the lowest COGS?
FIFO.
What is the journal entry to record estimated uncollectibles?
Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts.
What account is credited when recognizing revenue from a sale on account?
Sales Revenue.
Give an example of an accrued expense
Wages payable or interest payable
Under a periodic system, how is COGS calculated?
Using the formula after a physical count of inventory.
When prices are rising, which method results in the highest ending inventory?
FIFO.
What is the journal entry to write off an uncollectible account?
Debit Allowance for Doubtful Accounts, Credit Accounts Receivable.
What happens to Unearned Revenue when a company delivers the product?
It is debited (decreased), and Revenue is credited (increased).
How does depreciation relate to expense recognition?
It allocates the cost of a long-term asset to expense over its useful life.
What is included in the cost of inventory?
Purchase price, shipping (freight-in), and other costs to prepare goods for sale.
Which inventory method usually gives the lowest net income in times of inflation?
LIFO.
What type of account is the Allowance for Doubtful Accounts?
A contra-asset account to Accounts Receivable.