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

2. SIGNIFICANT ISSUES Revenue recognition criteria
Installment sales & cost recovery
Revenue recognition & right of return
% of completion & completed contract methods
Software & franchise sales
Profitability ratios

3. REALIZATION PRINCIPLE
Earnings process complete or virtually complete
Reasonable certainty as to collectibility

4. CURRENT DEVELOPMENTS SAB No. 101 FASB projects
Amended Concept Statement
Broad-based Recognition Standard

5. INSTALLMENT SALES Sale initially recorded on balance sheet only
Gross profit netted against installment receivables
Gross profit recognized in income as installments received

6. COST RECOVERY METHOD Sale initially recorded on balance sheet only
Gross profit netted against installment receivables
Gross profit recognized in income only after all costs are recovered from installments received

7. RIGHT OF RETURN/CONSIGNED
Delayed revenue recognition when significant, unpredictable level of returns
Consignment to distributors

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

9. LONG-TERM CONTRACTS Completed contract method
Percentage-of-completion method

10. COMPLETED CONTRACT Accumulate costs during project
Report billings to date as contra asset
Record revenue & cost at completion

11. PERCENTAGE-OF-COMPLETION
Accumulate costs during project
Report billings as contra-asset
Record revenue & cost based on % of actual costs to date to total actual & estimated costs
Accounting for losses?

12. INDUSTRY SPECIFIC Software revenue recognition
Franchise revenue recognition
Precious metals
Other

13. RATIOS Receivables turnover
Days-to-collect (Average collection period)
Inventory turnover
Days-to-sell (Average days in inventory)
Asset turnover

14. MORE RATIOS Gross margin Profit margin Return on assets (ROA)
Return on equity (ROE)