Logout Open In App
Open In App
Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

Chapter 24: Question 20Q (page 1452)

What is a performance obligation, and how is it used to determine when revenue should be recognized?

Short Answer

Expert verified

Performance obligations are a promise made by the seller of the good to its buyer to transfer goods or services at a particular time period.

Revenue should be recognized when it is realized or realizable and when it is earned.

Step by step solution

01

Definition of Performance Obligation

A promise containing obligations to act in accordance with the standards stated in the relevant agreement is known as a performance obligation.

02

Ways to determine when revenue should be recognized.

Companies recognize revenue when a performance obligation is fulfilled. The principle for recognizing revenue under certain generally accepted accounting principles (GAAP) states that the company should recognize revenue under the following terms:

  • At the point of production.
  • At the time of sale, and
  • On delivery or receipt of cash.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.’s operations.

(\(000 omitted)

2018

2017

2016

2015

2014

Sales revenue

\)20,000

\(16,000

\)14,000

\(6,000

\)4,000

Net income

2,400

14,000

800

700

250

Average total assets

22,000

19,000

11,500

4,200

3,000

Current assets

8,000

6,000

3,000

1,200

1,000

Working capital

3,600

3,200

1,200

500

400

Common shares:

Number of shares

Outstanding (000)

Average market price

2,000

\(9

2,000

\)6

2,000

$4

20

-

20

-

Instructions

  1. Comment on the appropriateness of declaring a cash dividend at this time, using the ratios computed in part (b) as a major factor in your analysis.

Cineplex Corporation is a diversified company that operates in five different industries: A, B, C, D, and E. The following information relating to each segment is available for 2018.

A

B

C

D

E

Sales revenue

\(40,000

\)75,000

\(580,000

\)35,000

\(55,000

Cost of goods sold

19,000

50,000

270,000

19,000

30,000

Operating expenses

10,000

40,000

235,000

12,000

18,000

Total expenses

29,000

90,000

505,000

31,000

48,000

Operating profit (loss)

\)11,000

\((15,000)

\)75,000

\(4,000

\)7,000

Identifiable assets

\(35,000

\)80,000

\(500,000

\)65,000

\(50,000

Sales of segments B and C included intersegment sales of \)20,000 and $100,000, respectively.

Instructions

(b) Prepare the necessary disclosures required by GAAP.

Carlton Company is involved in four separate industries. The following information is available for each of the four industries.

Operating Segment

Total Revenue

Operating Profit (Loss)

Identifiable Assets

W

\( 60,000

15,000

\)167,000

X

10,000

3,000

83,000

Y

23,000

(2,000)

21,000

Z

9,000

1,000

19,000

\(102,000

\)17,000

$290,000

Instructions

Determine which of the operating segments are reportable based on the:

b) Operating profit (loss) test.

Okay. Last fall, someone with a long memory and an even longer arm reached into that bureau drawer and came out with a moldy cheese sandwich and the equally moldy notion of corporate forecasts. We tried to find out what happened to the cheese sandwich—but, rats!, even recourse to the Freedom of Information Act didn’t help. However, the forecast proposal was dusted off, polished up and found quite serviceable. The SEC, indeed, lost no time in running it up the old flagpole—but no one was very eager to salute. Even after some of the more objectionable features—compulsory corrections and detailed explanations of why the estimates went awry—were peeled off the original proposal.

Seemingly, despite the Commission’s smiles and sweet talk, those craven corporations were still afraid that an honest mistake would lead them down the primrose path to consent decrees and class action suits. To lay to rest such qualms, the Commission last week approved a “Safe Harbor” rule that, providing the forecasts were made on a reasonable basis and in good faith, protected corporations from litigation should the projections prove wide of the mark (as only about 99% are apt to do).

Instructions

  1. What is the purpose of the “safe harbor” rule?

Snider Corporation, a publicly-traded company, is preparing the interim financial data which it will issue to its shareholders at the end of the first quarter of the 2017–2018 fiscal year. Snider’s financial accounting department has compiled the following summarized revenue and expense data for the first quarter of the year.

Sales revenue \(60,000,000

Cost of goods sold 36,000,000

Variable selling expenses 1,000,000

Fixed selling expenses 3,000,000

Included in the fixed selling expenses was the single lump-sum payment of \)2,000,000 for television advertisements for the entire year.

Instructions

a) Snider Corporation must issue its quarterly financial statements in accordance with IFRS regarding interim financial reporting.

2. State how the sales revenue, cost of goods sold, and fixed selling expenses would be reflected in Snider Corporation’s quarterly report prepared for the first quarter of the 2017–2018 fiscal year. Briefly y justify your presentation.

See all solutions

Recommended explanations on Business Studies Textbooks

Organizational Behavior

Read Explanation

Introduction to Business

Read Explanation

Strategic Analysis

Read Explanation

Human Resources

Read Explanation

Operational Management

Read Explanation

Change Management

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free