HIGHLIGHTS OF CHAPTER 5 Income Measurement Profitability Analysis

HIGHLIGHTS OF CHAPTER 5: Income Measurement & Profitability Analysis September 2004

SIGNIFICANT ISSUES þRevenue recognition criteria þInstallment sales & cost recovery þRevenue recognition & right of return þ% of completion & completed contract methods þSoftware & franchise sales þProfitability ratios

REALIZATION PRINCIPLE þEarnings process complete or virtually complete þReasonable certainty as to collectibility

CURRENT DEVELOPMENTS þSAB No. 101 þFASB projects § Amended Concept Statement § Broad-based Recognition Standard

INSTALLMENT SALES þSale initially recorded on balance sheet only þGross profit netted againstallment receivables þGross profit recognized in income as installments received

COST RECOVERY METHOD þSale initially recorded on balance sheet only þGross profit netted againstallment receivables þGross profit recognized in income only after all costs are recovered from installments received

RIGHT OF RETURN/CONSIGNED þDelayed revenue recognition when significant, unpredictable level of returns þConsignment to distributors

SERVICE REVENUES Recognize immediately ? . . . over time? . . . on service provided?

LONG-TERM CONTRACTS þCompleted contract method þPercentage-of-completion method

COMPLETED CONTRACT þAccumulate costs during project þReport billings to date as contra asset þRecord revenue & cost at completion

PERCENTAGE-OFCOMPLETION þAccumulate costs during project þReport billings as contra-asset þRecord revenue & cost based on % of actual costs to date to total actual & estimated costs þAccounting for losses?

INDUSTRY SPECIFIC þSoftware revenue recognition þFranchise revenue recognition þPrecious metals þOther

RATIOS þReceivables turnover þDays-to-collect (Average collection period) þInventory turnover þDays-to-sell (Average days in inventory) þAsset turnover

MORE RATIOS þGross margin þProfit margin þReturn on assets (ROA) þReturn on equity (ROE)