Principles of Finance · free preview
Recognizing Revenue and Expenses
Revenue is the value of goods and services sold in a period, recognized when earned under accrual accounting whether the customer pays now or later, while expenses are the costs consumed to generate that revenue, and the timing differences between earning, billing, and collecting create receivables and payables.
1. Revenue, the value created for customers
Revenue, the value created for customers
2. Expenses, the cost of earning
Expenses, the cost of earning
3. Short-term recognition in practice
Short-term recognition in practice
4. Why recognition rules matter to finance
Why recognition rules matter to finance
5. Defining revenue
Which statement best defines revenue for a given period under accrual accounting?
6. The credit sale entry
On April 1 a landscaper performs 500 dollars of services on account, payment due in 45 days. Under accrual accounting, when is the revenue recognized?
7. Expense timing with matching
A firm receives a fuel bill in August for fuel used on August jobs but pays it in September. Under accrual accounting, where does the cost appear?
8. Prepaid insurance
A company pays 12,000 dollars in January for a full year of insurance coverage. Under the matching principle, how should this cost appear in accrual accounting?
9. Where earnings management lives
Why do auditors and analysts pay special attention to revenue recognition policies?
10. Receivables and trust in earnings
Why do analysts care about the receivables balance when judging reported earnings?
11. The unpaid customer balance
What two-word term names the asset representing customers' unpaid promises to pay for goods or services already delivered? Answer in lowercase.
12. The unpaid supplier balance
What two-word term names the liability representing amounts owed to suppliers for goods or services already consumed? Answer in lowercase.
13. The value delivered line
What one-word term names the income statement's top line, the value of goods and services sold in the period? Answer in lowercase.
14. The spread of prepayments
What one-word term describes the month-by-month spreading of a prepaid cost like insurance as its benefit is consumed? Answer in lowercase.
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