Financial Accounting

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Previous Lessons
Open Chapter Ch. 1: Basics of Financial Accounting
Lesson #1 Introduction to Financial Accounting
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Lesson #2 Structures of a Business
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Lesson #3 Comparing Internal vs. External Users
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Lesson #4 Business Activities
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Lesson #5 Financial Statements
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Lesson #6 Elements of Financial Accounting
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Open Chapter Ch. 2: Assets, Liability, and Equity
Lesson #7 Assets
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Lesson #8 Liabilities
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Lesson #9 Equity
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Open Chapter Ch. 3: The Double-Entry System and Conceptual Framework
Lesson #10 Accounting Equation
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Lesson #11 Conceptual Framework
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Lesson #12 Double Entry Accounting System
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Lesson #13 Debits and Credits
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Lesson #14 Normal Balances and RED Accounts
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Exam Exam 1
Open Chapter Ch. 4: The Accounting Cycle
Lesson #15 Journalizing and the Accounting Cycle
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Lesson #16 Posting to the General Ledger
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Lesson #17 Trial Balance
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Lesson #18 Adjusting Entries for Accrued Expenses
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Lesson #19 Adjusting Entries for Prepaid Expenses
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Lesson #20 Adjusting Entries for Unearned Revenue
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Lesson #21 Adjusting Entries for Accrued Revenue
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Lesson #22 Adjusting Entries for Amortization and Depreciation
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Lesson #23 Adjusted Trial Balance
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Lesson #24 Preparing the Financial Statements
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Lesson #25 Permanent vs. Temporary Accounts
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Lesson #26 Closing Entries
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Open Chapter Ch. 5: Merchandise Inventory
Lesson #27 Introduction to Merchandise Inventory
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Lesson #28 Periodic vs. Perpetual Inventory Systems
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Lesson #29 Journalizing Purchase Entries
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Lesson #30 Journalizing Sales Transactions
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Lesson #31 Preparing a Multiple-Step Income Statement
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Lesson #32 Periodic Inventory System Purchases
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Lesson #33 Periodic System and the Multiple-Step Accounting System
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Exam Midterm Exam
Open Chapter Ch. 6: Cost Flow Assumptions: FIFO, LIFO, and Average Cost Methods
Lesson #34 Specific Identification Method and Inventory Costing
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Lesson #35 FIFO Method and Inventory Costing
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Lesson #36 Average Cost Method and Inventory Costing
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Lesson #37 The LIFO Method
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Lesson #38 Average Cost Method for the Perpetual System
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Lesson #39 Comparing Inventory Costing Methods
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Open Chapter Ch. 7: Receivables and Bad Debts
Lesson #40 Allowance Method and Uncollectibles
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Lesson #41 The Allowance Method
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Lesson #42 Percentage of Sales Method
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Lesson #43 Percentage of Receivables Method
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Lesson #44 Receivables Method and the Aging Table
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Lesson #45 Write Off Receivables Using the Allowance Method
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Lesson #46 Direct Write-Off Method
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Open Chapter Ch. 8: Revenue Recognition
Lesson #47 Revenue Recognition
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Lesson #48 Revenue Recognition Examples
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Lesson #49 Revenue Recognition and Long Term Contracts
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Lesson #50 Percentage of Completion Method
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Lesson #51 Percentage of Completion Method Journal Entries
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Lesson #52 Percentage of Completion Method and Journalizing Losses
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Lesson #53 Cost Recovery Method
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Lesson #54 Completed Contract Method and Journal Entries
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Lesson #55 Completed Contract Method and Losses
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Exam Exam 3
Open Chapter Ch. 9: Depreciation of Fixed Assets and Gains and Losses
Lesson #56 Depreciation, Amortization and Depletion
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Lesson #57 Straight Line and Declining Balance Methods
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Lesson #58 Straight Line and Double Declining Balance Depreciation Examples
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Lesson #59 Gains and Losses on Disposals of Property, Plant & Equipment
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Open Chapter Ch. 10: Intangible Assets
Lesson #60 Intangible Assets
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Lesson #61 Amortizing Intangible Assets
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Lesson #62 Impairment of Intangible Assets
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Lesson #63 Recording Goodwill, Amortization and Impairment
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Open Chapter Ch. 11: The Indirect Cash Flow Statement
Lesson #64 Preparing a Cash Flow Statement Using the Indirect Method Part 1
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Lesson #65 Cash Flow Statement Using Indirect Method Part 2, Receivables
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Lesson #66 Cash Flow Statement Using Indirect Method Part 3, Inventory
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Lesson #67 Cash Flow Statement Using Indirect Method Part 4, Payables
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Lesson #68 Cash Flow Statement Using Indirect Method Part 5, Non Cash Expenses
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Lesson #69 Cash Flow Statement- Investing and Financing Activities
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Exam Final Exam

Assignments:

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Lesson Objectives:

- Determining when to recognize revenue
- Consignment and buyers criteria examples
- Introduction to long-term contracts



We talked about the revenue recognition criteria in the previous lesson. As a reminder, here is the criteria that should be used in determining when to recognize revenue:
 
Performance
 
Measurability must be reasonably certain. This means that the company must have a firm idea of the expectation for the pricing based on historical results and value.
 
The risk and rewards associated with the revenue have transferred substantially. These factors are transferred when the good is shipped to the customer.
 
 
Collectibility
 
Collectibility is reasonably assured meaning there is a greater chance than not of the payment being collected. The customer must have the ability and intent to pay for the product or service.

Let's look at a few more real life examples and how they fit into the criteria before we dive into the topic of long term contracts.



When goods are on consignment, that basically means that there is a consigner giving products to the consignee who will hopefully sell the products to a third party. The purpose of doing this is for the consignee to make a commission of the sale. An example would be when a publishing company gives books to a store to sell to their customers.
 
For the purpose of looking at revenue recognition, we will look at the consignor's revenue. The tricky part is that the consignor is not recognizing revenue when they give the goods to the consignee for several reasons in accordance with the criteria.
 
The measurability of the price is not reasonably certain because they may have to offer a discount on the product if it is not sold within a specific period of time.
 
The risk and rewards have not fully transferred because the consignee could still return the goods to the consignor.
 
Collectibility is also not assured because the goods have not yet been sold to a customer.
 
For a consignment situation, the revenue should be recognized when the goods are sold to a third party by the consignee.
 
The next example we will review is known as the buyer criteria check.



The buyer criteria check is most commonly used for art purchases, when the buyer determines whether the inventory they are purchasing is acceptable. This means that the product is subject to a check when it is received. The buyer has an opportunity to return it if it is not what they wanted or if it is damaged.

With this type of purchase, if the art doesn't pass the buyer's check and it is returned, the seller would not be able to recognize the revenue.

The seller may recognize the revenue once the buyers check is passed. At this time, measurability of the sale price will be certain and the seller is reasonably assured that payment will be collected.
 
Now, let's look an example of a long term contract.



Let's say the government has signed a long term contract for a laboratory building to be built over the course of four years. The job would involve a specific set of blueprints that the builders must follow when constructing the building.

This example would present a level of uncertainty when it comes to the cost performance as the risk and rewards are not transferred instantly because the laboratory building hasn't been built yet. The cost is defined in the contract but the government cannot yet reap the benefits from the building until it is completed.
 
Collectibility is not assured yet because again the building is not built yet as it is a long term contract. If for some reason it is not built to the proper specifications or ends up damaged, there is a risk for legal action against the contracted builder.
 
Recognizing revenue for long term contracts is a bit more complicated than simply using the performance and collectibility criteria. In the next lesson, we will cover exactly how to determine when revenue should be recognized when it comes to long term contracts such as the laboratory example.