FINANCIAL

1

• FINANCIAL
• ACCOUNTING
• A U s e r P e r s p e c t i v e
• Third Canadian Edition

Hoskin ? Fizzell
2
C h a p t e r
4

• Revenue Recognition

3
Performance Measurement

• Return on Investment
• ROI Return
• Average investment
• Example 50 5
  1,000

4
Performance Measurement

• Return on Investment
• What is the benchmark?
• How do we know if it was a good investment?

5
Performance Measurement

• Return on Assets (ROA)
• Formula?
• Used to determine how effectively are assets
  being used to earn income
• Return on Equity (ROE)
• Measures return of Shareholders

6
Cash-to-Cash Cycle

• The process of the outflow of cash to the inflow
  of cash ( from operating activities )
• Initial Cash comes from where?

7
Cash-to-Cash Cyclefor a Retail Company

Acquisition of inventory
Selling activity
Cash
Collection
Delivery of product
Warranty service
8
Cash-to-Cash Cycle

• Cash investment
• Shareholders investments or Loans
• Acquisitions
• Acquire property, plant, and equipment
• Hire labour
• Purchase inventory

9
Cash-to-Cash Cycle

• Selling activity
• Promote and sell the product
• Delivery of product
• Collection
• Cash received immediately, or
• An amount to be received later accounts
  receivable

10
Cash-to-Cash Cycle

• Warranty service
• Seller is responsible for replacement or repair
  of the product

11
Cash-to-Cash Cycle

• Very slow to assess the performance of the
  company
• Therefore, we assess operating performance via
  revenues and expenses

12
Revenue Recognition

• Revenues
• Inflows of cash or other assets from normal
  operating activities
• Sale of goods or services
• Expenses
• Costs incurred to earn revenues

13
Revenue Recognition

• Net income
• Revenues less expenses
• In the RED Means?
• Matching principle
• All costs incurred to produce the revenue must be
  recognized at the same time the revenue is
  recognized

14
Revenue Recognition Criteria

• Revenue is recognized when
• It is earned (risks transferred)
• The amount is measurable
• There is reasonable assurance that the amounts
  earned can be collected from the buyer

15
Revenue Recognition Criteria

• Knowing the Revenue Recognition policy is
  important in order to assess the reliability of
  the information.
• Recognition Conflict?

16
Revenue Recognition Criteria

• GAAP attempts to resolve this conflict with
  timely, yet reliable information

17
Revenue Recognition

• 1st Method
• At the time of sale and/or shipment to the
  customer
• Title to the goods has been transferred
• Revenue has been earned

18
Revenue Recognition

• FOB- Free On Board Legal Term to describe
  passing of Title
• FOB Shipping Point
• FOB Destination Point

19
Unearned Revenue

• Deposit received in advance
• Cash 500
• Unearned revenue 500
• When goods are delivered
• Unearned revenue 500
• Sales revenue 500

20
Unearned Revenue

• Example West Jet Airlines- pg 231

21
Revenue Recognition

• 2nd Method - At the time of contract signing
  (Franchise Sales and Land Sales)
• Basic criteria must be met
• Only minimal costs yet to be incurred
• Reasonable chance of collecting receivables

22
Revenue Recognition

• 3rd Method-(Mining Industry)
• Critical event is the production, not the sale,
  of the ore
• Forward or Option Contracts to support
  measurability

23
Revenue Recognition

• 4 5 Methods-CONSTRUCTION INDUSTRY
• Long-term construction
• Completed contract method
• Percentage of completion method
• If loss is known it is recognized immediately

24
Percentage of Completion Method

• Expenses for the period Percentage
• Total cost of project completed
• Percentage X Total Revenue to be
• completed revenue recognized
• this period

25
Percentage of Completion Method
26
Revenue Recognition

• Method 6- At the time of collection
• Instalment method
• Used when collection is uncertain
• Payments cover cost recovery, interest, and
  profits

27
Instalment Method

• Very uncommon in Canada
• Only used if cash collection doubtful

28
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