1. FINANCIAL ACCOUNTING A USER PERSPECTIVE
Hoskin • Fizzell • Davidson
Second Canadian Edition

2. Revenue Recognition
Chapter Four

3. Performance Measurement
Return on Investment
ROI = Return
Average investment
Example: $50 = 5%
$1,000

4. Performance Measurement
Return on Investment
Compare to the returns on other investments to determine if this is a good investment
Is the investment worth the original $1,000 plus the $50 return?

5. Performance Measurement
Return on Assets (ROA)
measures income earned per $1 of assets
Return on Equity (ROE)
measures income earned per $1 invested in shares of the company

6. Cash-to-Cash Cycle Exhibit 4-1
Acquisition of inventory
Selling activity
Cash
Delivery of product
Collection
Warranty service

7. Cash-to-Cash Cycle Cash Acquisition of Inventory
loans or investments by shareholders
Acquisition of Inventory
acquire property, plant and equipment
hire labour
purchase inventory

8. Cash-to-Cash Cycle Selling Activity Delivery of Product Collection
promote and sell the product
Delivery of Product
Collection
cash received immediately, or
accounts receivable: payments later

9. Cash-to-Cash Cycle Warranty Service
written or implied guarantee of quality
seller is responsible for replacement or repair of the product

10. Revenue Recognition Revenues Expenses
inflows of cash or other assets from normal operating activities
sale of goods or provision or services
Expenses
costs incurred to earn revenues

11. Revenue Recognition Net income Matching principle
Revenues less expenses
Matching principle
all costs incurred to produce the revenue must be recognized at the same time that the revenue is recognized

12. Revenue Recognition Criteria
Revenue is recognized when:
it is earned (substantially completed)
the amount earned can be measured
there is reasonable assurance of collectibility of the amount earned

13. Revenue Recognition
At the time of sale and/or shipment to the customer
title to the goods has been transferred
revenue has been earned
most common recognition

14. Revenue Recognition at Time of Sale - Exhibit 4-2
HAWKE COMPANY
Income Statement
For the period ended December 31, 2001
Revenues $ 30,000
Cost of goods sold ,000
Gross profit ,000
Warranty expense
Net income $ 7,500

15. Revenue Recognition Deposit received in advance
A-Cash
L-Unearned revenue 500
When goods are delivered
SE-Sales revenue

16. Revenue Recognition At the Time of Contract Signing
Franchising and retail land sales
Basic criteria must be met:
only minimal costs yet to be incurred
reasonable chance of collecting receivables

17. Revenue Recognition At the Time of Production Mining
critical event is the production of ore
Long-term construction
completed contract method, or
percentage of completion method

18. Percentage of Completion Method
Expenses for the period
Percentage completed =
Total cost of project
Revenue to be recognized this period
Percentage completed
Total revenue  =

19. Percentage of Completion Method

20. Revenue Recognition At the Time of Collection instalment method
used when collection is uncertain
payments cover cost recovery, interest, and profits

21. Instalment Method Profit % = ($100,000 - 70,000) 100,000 = 30%
Gross profit
= Payments applied to principal
x profit %
= (Cash received - interest) x profit %

22. Instalment Method

23. Revenue Recognition Multiple Lines of Business
revenue recognition criteria may be met at different points for different products
Disclosure of Revenue Recognition
Notes to the Financial Statements