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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Codification

Situation

You are conducting an accounting research project for your boss. Your boss has asked you to determine the appropriate U.S. GAAP that specifies how your company should recognize revenues from the sales of products in a retail store. Your boss is confused because most customers pay cash, but some customers purchase on credit terms, and pay in cash 30 days later. Your manager also wants you to determine the GAAP guidance for how revenue should be recognized in income. Your manager has a lot of knowledge and experience in accounting and has heard about, but has never used, the FASB Accounting Standards Codification system.

Directions

Use the FASB Accounting Standards Codification system to conduct the research your manager has assigned to you. Use the Codification to determine how to recognize revenue from retail sales, including the right to return. Be prepared to show your manager the specific FASB ASC references that provide the appropriate guidance. Also prepare a brief memo explaining to your manager the different levels of the Codification and how to use the Codification system.

To determine

Draft a memorandum explaining the instructions to use FASB ASC references related to the recognition of retail sales revenue, cash collection and credit terms as per GAAP, the structure of FASB Accounting Standard Codification (ASC) system, and its structure.

Explanation

Financial Accounting Standards Board (FASB): FASB is the organization which creates, develops, and approves accounting standards; and administrates Generally Accepted Accounting Principles (GAAP).

Draft a memorandum explaining the instructions to use FASB ASC references related to the recognition of retail sales revenue, cash collection and credit terms as per GAAP, the structure of FASB Accounting Standard Codification (ASC) system, and its structure.

MEMO

Date:        April 3, 2019

To:        The Professor

From:        Ms J, Assistant Professor

Subject:  FASB Accounting Standard Codification system

Revenue recognition is an accounting principle that requires to record the earned revenue when it is either or realizable. The main considerations for revenue recognition are explained as follows:

  • Being realized or realizable: Revenue is considered as realized when the revenue is earned and received. Revenue is considered as realizable when the revenue is earned but not received. The companies recognize such realized or realizable revenues.
  • Being earned: When a company sells goods or services, the revenue is earned. Sometimes, companies receive revenues in advance. Such revenues are recorded as unearned revenue as a current liability. Such revenues would be recorded as earned only when the goods or services are sold.

The complete summary of recognition of revenue is found in the FASB ASC 605-10-25-1.

FASB Accounting Standard Codification system is an electronic application recognized by FASB, which provides access to users about the authoritative Generally Accepted Accounting Principles (GAAP). The Codification is the major source of accounting standards, and integrates the basis for recording transactions, and reporting the financial statements. Securities Exchange Commission is the government agency that governs the Financial Accounting Standards Board (FASB) along with the financial markets.

The user should obtain user account to login by registering through the FASB website provided in the chapter. The user can view the website home page after logging in. The content of the Codification is organized in the following hierarchical structure:

  1. Areas: Areas is a component which is listed on the home page, represents nine broad and general accounting issues like General Principles, Presentation, Assets, Liabilities, Equity, Revenue, Expenses, Broad Transactions, and Industry...

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