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Revenues & Expenses

Revenues & Expenses. Asset accounting issues. Revenues. Investors (and other Stakeholders) place great importance on revenues in making decisions. Revenues. Investors (and other Stakeholders) place great importance on revenues in making decisions. What is revenue?. Revenues.

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Revenues & Expenses

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  1. Revenues & Expenses Asset accounting issues

  2. Revenues • Investors (and other Stakeholders) place great importance on revenues in making decisions. International Business Program Financial Accounting

  3. Revenues • Investors (and other Stakeholders) place great importance on revenues in making decisions. • What is revenue? International Business Program Financial Accounting

  4. Revenues • Investors (and other Stakeholders) place great importance on revenues in making decisions. • What is revenue? • Inflow of resources from the primary business activity • Marco’s bingo winnings Question 3.3, page 65 International Business Program Financial Accounting

  5. Revenues • Investors (and other Stakeholders) place great importance on revenues in making decisions. • Why? International Business Program Financial Accounting

  6. Revenues • Investors (and other Stakeholders) place great importance on revenues in making decisions. • Why? • The purpose of business enterprise is to sell goods and services. International Business Program Financial Accounting

  7. Revenue Recognition • When seller or provider has done something that clearly establishes it has earned revenue • Both seller and buyer have essentially completed obligation International Business Program Financial Accounting

  8. Revenue Recognition (continued) • Seller has transferred to buyer the risks and rewards of ownership • Seller has no significant control • Amount of transaction can be reliably established • Costs, past and future, can be measured reliably (Text pg. 89) International Business Program Financial Accounting

  9. Revenue recognition examples (What do we mean by word ‘example’?) • Sale of goods by manufacturer, wholesaler, retailer • Sale of services in professional practice • No significant issues (straightforward) International Business Program Financial Accounting

  10. Revenue recognition examples (continued) • Resources received in advance; Goods and services provided in future • Liability for unearned revenues • NB liability is not satisfied with cash • Often seller earns revenues with passage of time; no explicit activity Further discussion in textbook pp. 90-91. Limited to certain business and industries International Business Program Financial Accounting

  11. Revenue recognition examples (continued) • Resources received in the future • Trade credit (majority of businesses) • Creates a valid asset – receivables • Measurement? • fair value of goods or services • Diletta Ferrari pg. 86 & pg. 67 International Business Program Financial Accounting

  12. Revenue recognition examples (continued) • Resources received in the future (continued) • Discounts, allowances, rebates, etc? • Reduce revenue, not expenses • Why? • Text pg. 83 • Exception: large amount of returns expected. What happens then? International Business Program Financial Accounting

  13. Revenue recognition examples (continued) • Resources received in the future (continued) • Some trade credit never paid; normal risk of business • Reduce revenue or recognize expense? • Recognize at time of sale or when non-payment obvious? • Asset valuation? International Business Program Financial Accounting

  14. Revenue recognition examples (continued) • Resources received in the future (continued) • Analytical tools • Receivables turnover • Days uncollected • Assess impact of financial decisions of seller International Business Program Financial Accounting

  15. Revenue recognition examples (continued) • Long-term construction- e.g.buildings, infrastructure, aircraft, ships • What is primary economic activity measured? • Proportionate completion of project? • Final delivery of object? • Prudence vs. matching • Current view of IAS is proportionate with exceptions International Business Program Financial Accounting

  16. Inventories and Cost of Sales • Major element of earning revenue for many types of companies • Defines business cycle for many companies • Cost of sales is largest single expense for many companies. • Why? • Diletta Ferrari pg. 86 & 67 International Business Program Financial Accounting

  17. Inventories and Cost of Sales (continued) • Must assign value to inventory. • Why? International Business Program Financial Accounting

  18. Inventories and Cost of Sales (continued) • Must assign value to inventory. Why? • Match expense of selling goods against revenue earned • Reflect asset in balance sheet • Very rarely can measure directly. • Why? • Accounting conventions – FIFO, AVCO NB: LIFO NOT COVERED IN COURSE International Business Program Financial Accounting

  19. Inventories and Cost of Sales (continued) • Accounting conventions (continued) • FIFO – earliest goods purchased are ones sold • AVCO – cost of sale is average • Weighted • Moving (not in text) • Follow example in text pp. 106-108 NB: LIFO NOT COVERED IN COURSE International Business Program Financial Accounting

  20. Inventories and Cost of Sales (continued) • Lower NRV (continued) • Sometimes replacement cost and net realizable value of inventory declines. • Why? • Give examples International Business Program Financial Accounting

  21. Inventories and Cost of Sales (continued) • Lower NRV (continued) • Replacement cost and NRV of inventory declines. • Why? Give examples • Technology become mature or obsolete • Mobile telephones • Computers • Memory sticks International Business Program Financial Accounting

  22. Inventories and Cost of Sales (continued) • Lower NRV Value (continued) • When is loss of value recognized? • Period when goods are held? • Period when goods are sold? • Matching principle International Business Program Financial Accounting

  23. Inventory Misstatements • Major analytical tool • Direct relationship between ending inventory and profit • Other things being equal: • Increase ending inventory, increase profit; and vice versa • Increase beginning inventory, decrease profit; and vice versa International Business Program Financial Accounting

  24. Inventory Ratios • Other major analytical tools • Inventory turnover • Average days in inventory • Depends on type of business!!!!!!!!!! International Business Program Financial Accounting

  25. Non-current Assets and Profits • Tangible – physical substance • Intangible – no physical substance • In concept are the same • Intangibles present practical difficulties International Business Program Financial Accounting

  26. Non-current Assets and Profits (continued) • Capital Expenditures • Future benefit • Contribute to earning revenue over time • Match against revenues when contribute • Depreciation and amortisation • Current expenses • Contribute to earning revenues in current period; matching • WorldCom scandal International Business Program Financial Accounting

  27. Non-current Assets and Profits (continued) • Initial cost • All costs associated with acquiring, e.g. • Purchase price, taxes, less discounts, etc. • Delivery, installation, etc. • Professional fees for architects, lawyers, etc. • Estimated future cost to dismantle • Interest directly associated with acquisition • Example pg. 132 International Business Program Financial Accounting

  28. Non-current Assets and Profits (continued) • Subsequent costs • If increases future benefits, capitalize • Otherwise, expense International Business Program Financial Accounting

  29. Non-current Assets and Profits (continued) • Depreciation and amortization • Match cost of using asset against revenue earned • Based on cost (and subsequent additions) • Useful life • Residual value (may be negative) International Business Program Financial Accounting

  30. Non-current Assets and Profits (continued) • Depreciation and amortisation methods • These are not choices!!!!!!!!!!!!! • Straight-line • Most commonly used. Why? • Accelerated (declining balance and sum of units) • Should raise analytical questions. Why? (You do not need to know how to compute) International Business Program Financial Accounting

  31. Non-current Assets and Profits (continued) • Disposals • Straightforward; see text International Business Program Financial Accounting

  32. Non-current Assets and Profits (continued) • Leased assets • One company has contractual right to use an asset owned by another company • Can present analytical issues • Review • Definition of asset • Concept of substance over form International Business Program Financial Accounting

  33. Non-current Assets and Profits (continued) • Leased assets (continued) • If substance of transaction is equivalent to purchase, must reflect • Asset – lesser issue • Liability – This is the major issue! • At present value of future cash flows (fair value) • Typically minimal impact on expense • Why? International Business Program Financial Accounting

  34. Non-current Assets and Profits (continued) • Intangible assets • In substance same as tangible assets • Present practical difficulties International Business Program Financial Accounting

  35. Non-current Assets and Profits (continued) • Intangible assets (continued) • Examples in text (pg. 131) • IAS addresses practical issues • Identifiable (or separable) • Controlled • Acquired in transaction • Significant analytical issues in some industries, e.g. pharmaceuticals • Special issues with R & D International Business Program Financial Accounting

  36. Non-current Assets and Profits (continued) • Natural resources • Same concepts apply • Procedures vary slightly • Depletion based on units, not time International Business Program Financial Accounting

  37. Non-current Assets and Profits (continued) • Impairment issues • Just like inventory, some non-current assets have values that are impaired • Why? • When should impairment loss be recognized? Matching • Reflect present value of future cash flows or NRV. International Business Program Financial Accounting

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