R G QUINTERO CO CFA LEVEL I QNOTES

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R. G. QUINTERO & CO. CFA LEVEL I Q-NOTES STUDY SESSION 8 (EXCERPT) FINANCIAL

R. G. QUINTERO & CO. CFA LEVEL I Q-NOTES STUDY SESSION 8 (EXCERPT) FINANCIAL STATEMENT ANALYSIS: UNDERSTANDING THE FINANCIAL STATEMENTS www. rgquintero. com

SESSION 8 OVERVIEW Ø Understanding the Income Statement Ø Understanding the Balance Sheet Ø

SESSION 8 OVERVIEW Ø Understanding the Income Statement Ø Understanding the Balance Sheet Ø Understanding the Cash Flow Statement Level I - Session 8 ©R. G. Quintero & Co. 2

UNDERSTANDING THE INCOME STATEMENT by Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and

UNDERSTANDING THE INCOME STATEMENT by Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn Level I - Session 8 ©R. G. Quintero & Co. 3

Level I - Session 8 ©R. G. Quintero & Co. 4

Level I - Session 8 ©R. G. Quintero & Co. 4

WHEN TO RECOGNIZE REVENUES* Ø Evidence of arrangement between buyer and seller Ø Product

WHEN TO RECOGNIZE REVENUES* Ø Evidence of arrangement between buyer and seller Ø Product has been delivered or services rendered Ø Price has been determined or is determinable Ø Seller has reasonable assurance of payment *SAB 101 Level I - Session 8 ©R. G. Quintero & Co. 5

SPECIAL SITUATIONS AFFECTING REVENUE RECOGNITION Ø Long-term contracts § Pct. of completion vs. completed

SPECIAL SITUATIONS AFFECTING REVENUE RECOGNITION Ø Long-term contracts § Pct. of completion vs. completed contract A/C Ø Installment sales Ø Barter T/A’s Ø Gross and net reporting Level I - Session 8 ©R. G. Quintero & Co. 6

PERCENTAGE OF COMPLETION vs. COMPLETED CONTRACT ACCOUNTING Percentage of Completion Completed Contract LT contracts

PERCENTAGE OF COMPLETION vs. COMPLETED CONTRACT ACCOUNTING Percentage of Completion Completed Contract LT contracts extending over > 1 A/C period Applicability • Costs subject to estimation • Costs may or may not be subject to estimation Revenue recognition • Costs incurred as % of total • At end of project • Job progress estimates as % of total job Expense recognition • % of total costs x % of total revenues recognized • At end of project Earnings recognition • Throughout term of project • At end of project Loss recognition • Entire is amount as soon as it is subject to estimation Cash flow Level I - Session 8 Identical under both methods ©R. G. Quintero & Co. 7

Level I - Session 8 ©R. G. Quintero & Co. 8

Level I - Session 8 ©R. G. Quintero & Co. 8

Level I - Session 8 ©R. G. Quintero & Co. 9

Level I - Session 8 ©R. G. Quintero & Co. 9

PERCENTAGE OF COMPLETION vs. COMPLETED CONTRACT Ø Income statement and balance sheet differ during

PERCENTAGE OF COMPLETION vs. COMPLETED CONTRACT Ø Income statement and balance sheet differ during project; identical at end Ø Cash flows are identical Ø Pct of completion can result in errors or manipulation Ø Completed contract can cause § Sales and earnings volatility § Erroneous view of earnings during period Level I - Session 8 ©R. G. Quintero & Co. 10

1. Rudlen Company had an $80 million contract with a 20% gross margin that

1. Rudlen Company had an $80 million contract with a 20% gross margin that was completed during the 4 th quarter of 2007. It incurred costs of $10 million on the contract during that quarter. Its 4 th quarter revenues under percentage of completion and completed contract accounting would be reported as: a. b. c. d. $10 million and $16 million, respectively. $12 million and $80 million, respectively. $12. 5 million and $80 million, respectively. $16 million and $80 million, respectively. Level I - Session 8 ©R. G. Quintero & Co. 11

Excludes pages 12 – 119 for Study Session 8 Level I - Session 8

Excludes pages 12 – 119 for Study Session 8 Level I - Session 8 ©R. G. Quintero & Co. 12