Wednesday 18 January 2012
Guidelines for Revenue Recognition
In general, the guidelines for revenue recognition are quite broad. On top of the broad
guidelines, certain industries have specific additional guidelines that provide further
insight into when revenue should be recognized. The revenue recognition
principle provides that companies should recognize revenue (1) when it is realized
or realizable and (2) when it is earned. Therefore, proper revenue recognition
revolves around three terms
Revenues are realized when a company exchanges goods and services for cash or
claims to cash (receivables).
Revenues are realizable when assets a company receives in exchange are readily
convertible to known amounts of cash or claims to cash.
Revenues are earned when a company 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.
Four revenue transactions are recognized in accordance with this principle:
1. Companies recognize revenue from selling products at the date of sale. This
date is usually interpreted to mean the date of delivery to customers.
2. Companies recognize revenue from services provided, when services have
been performed and are billable.
3. Companies recognize revenue from permitting others to use enterprise assets,
such as interest, rent, and royalties, as time passes or as the assets are used.
4. Companies recognize revenue from disposing of assets other than products
at the date of sale.
Who Uses Accounting Data
The information that a user of financial information needs depends upon
the kinds of decisions the user makes.There are two broad groups of users
of financial information: internal users and external users.
INTERNAL USERS
Internal users of accounting information are those individuals inside a company
who plan, organize, and run the business. These include marketing managers, production
supervisors, finance directors, and company officers.
Managerial accounting
provides internal reports to help users
make decisions about their companies. Examples are financial comparisons of operating
alternatives, projections of income from new sales campaigns, and forecasts
of cash needs for the next year.
EXTERNAL USERS
External users are individuals and organizations outside a company who want financial
information about the company. The two most common types of external
users are investors and creditors. Investors (owners) use accounting information to
make decisions to buy, hold, or sell ownership shares of a company. Creditors (such
as suppliers and bankers) use accounting information to evaluate the risks of
granting credit or lending money.
Financial accounting
answers these questions. It provides economic and financial
information for investors, creditors, and other external users. The information
needs of external users vary considerably. Taxing authorities (such as the Internal
Revenue Service) want to know whether the company complies with tax laws.
Regulatory agencies, such as the Securities and Exchange Commission and the
Federal Trade Commission, want to know whether the company is operating within
prescribed rules. Customers are interested in whether a company like General
Motors will continue to honor product warranties and support its product lines.
Labor unions such as the Major League Baseball Players Association want to know
whether the owners can pay increased wages and benefits.
WHAT IS ACCOUNTING? (2)
Why is accounting so popular? What consistently ranks as one of the top
career opportunities in business? What frequently rates among the most
popular majors on campus? What was the undergraduate degree chosen
by Nike founder Phil Knight, Home Depot co-founder Arthur Blank, former acting
director of the Federal Bureau of Investigation (FBI) Thomas Pickard, and numerous
members of Congress? Accounting.1 Why did these people choose accounting?
They wanted to understand what was happening financially to their
organizations. Accounting is the financial information system that provides these
insights. In short, to understand your organization, you have to know the numbers.
Accounting
consists of three basic activities—it identifies, records, and communicates
the economic events of an organization to interested users. Let's take a
closer look at these three activities.
Three Activities
To identify economic events, a company selects the economic events relevant to its
business. Examples of economic events are the sale of snack chips by PepsiCo,
providing of telephone services by AT&T, and payment of wages by Ford Motor
Company.
Once a company like PepsiCo identifies economic events, it records those
events in order to provide a history of its financial activities. Recording consists of
keeping a systematic, chronological diary of events, measured in dollars and cents.
In recording, PepsiCo also classifies and summarizes economic events.
Finally, PepsiCo communicates the collected information to interested users by
means of accounting reports. The most common of these reports are called
financial statements. To make the reported financial information meaningful,
Kellogg reports the recorded data in a standardized way. It accumulates information
resulting from similar transactions. For example, PepsiCo accumulates all sales
transactions over a certain period of time and reports the data as one amount in the
company's financial statements. Such data are said to be reported in the aggregate.
By presenting the recorded data in the aggregate, the accounting process simplifies
a multitude of transactions and makes a series of activities understandable and
meaningful.
A vital element in communicating economic events is the accountant's ability
to analyze and interpret the reported information. Analysis involves use of ratios,
percentages, graphs, and charts to highlight significant financial trends and relationships.
Interpretation involves explaining the uses, meaning, and limitations of
reported data. Appendix A of this textbook shows the financial statements of
PepsiCo, Inc.; Appendix B illustrates the financial statements of The Coca-Cola
Company. We refer to these statements at various places throughout the text. At
this point, they probably strike you as complex and confusing. By the end of this
course, you'll be surprised at your ability to understand, analyze, and interpret them.
You should understand that the accounting process includes the bookkeeping
function. Bookkeeping
usually involves only the recording of economic events. It is
therefore just one part of the accounting process. In total, accounting involves the
entire process of identifying, recording, and communicating economic events.
Tuesday 17 January 2012
Timing issues
Accountants divide the economic life of a business into artificial time periods
(Time Period Assumption)
- Generally a month, a quarter, or a year.
- Fiscal year vs. calendar year
- Also known as the "Periodicity Assumption"
Accrual- vs. Cash-Basis Accounting
Accrual-Basis Accounting
- Transactions recorded in the periods in which the events occur
- Revenues are recognized when earned, rather than when cash is received.
- Expenses are recognized when incurred, rather than when paid.
Cash-Basis Accounting
- Revenues are recognized when cash is received.
- Expenses are recognized when cash is paid.
- Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP).
The Ledger
A General Ledger contains the entire group of accounts maintained by a company.
The General Ledger includes all the asset, liability, owner’s equity, revenue and expense accounts.
Double entry
Accounting Career Opportunities
Ethics In Financial Reporting
What is Accounting?
Tuesday 8 September 2009
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Friday 4 September 2009
Theories & Further Information about Shareholder's Equity
The share capital may be made up of both ordinary and preference shares, though preference shares are much less popular these days for tax reasons. However, in the notes to the accounts there may also be a figure for Authorised Share Capital. This may be very different to the Issued Share Capital. The authorised capital is the maximum amount of money that the shareholders have decided that the company can issue in shares and will usually be considerably larger than the issues share capital as the company wants to retain the option of issuing more shares in the future to raise more capital - perhaps to fund an expansion.
The reserves will include retained profit from the past. That is profits that the firm has kept for itself and not issued to shareholders in the form of a dividend. They may also include share premiums. As mentioned in the explanation of shareholder's equity, this is where shares are issued at more than their face value. The face value of the share may be, say £1, but they may be issued at £3.50 because the market has risen in the meantime and the shares are now worth much more. The £1 will be included as part of the issued share capital (see above), but the other £2.50 will be called a share premium. A final part of reserves may be something called revaluations. If the company's assets have risen in value - perhaps because of inflation - this is effectively a source of funds for the shareholders and so also needs to be recorded on the bottom half of the balance sheet. This situation can occur particularly with property companies such as hotel operators where the value of the properties rises with a booming property market.
The shareholder's equity is shown on the balance sheet as part of the balancing figure - the one that matches the net assets. It is therefore a key part of the capital financing of the business.
What is Shareholder's Equity?
As well as the shareholder's equity the net assets may be financed by:
•Retained profit & reserves
•Loans & debentures
There may also be other more detailed sources of capital shown on a balance sheet. These may include the "share premium account". This is where the shares are issued at above their face value. The amount raised from the sale of shares is then split into two - the share capital (the face value of all the shares) and the share premium account (the surplus over and above the face value).
The shareholder's equity may also be known as the equity capital. The reward to the shareholders for investing this money in the business is a share of the profit - a dividend . The amount of the dividend clearly depends on the profitability of the business.
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