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30 Cards in this Set

  • Front
  • Back

Performance Obligation

Are promises by the seller to transfer goods or services to a customer.

Seller recognizes revenue when it satisfies a performance obligation by transferring the promised good or service.


*Goods or services provided by sellers require this quality to be treated as a performance obligation.

1. Capable of being distinct

2. Separately identifiable from other goods or services in the contract

Transaction Price

Is the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and service

Stand-alone Selling Prices

Is the amount at which the good or service is sold separately under similar circumstances.


Is an agreement that creates legally enforceable rights and obligations.

Can be explicit, oral, or written

Quality-Assurance Warranties

A warranty that is sold with most products, which obligates the seller to make repairs or replace products that later are found to be defective or unsatisfactory.

1. Not sold separately

2. Can be stated explicitly or implicitly

3. not a performance obligation

4. Rather, the cost of satisfying a performance obligation to deliver products of acceptable quality

Extended Warranties

Offered as an additional service that covers new problems arising after the customer takes control of the product.

1. Provides protection beyond the manufacturer's quality-assurance warranty.

2. constitutes a performance obligation

3. can be viewed as a separate transaction

Variable Consideration

*When a transaction price is uncertain because some of the price depends on the outcome of future events


1. Construction(incentive payments)

2.Entertainment and media(royalties)

3.Health care( Medicare and Medicaid reimbursements)

4. Manufacturing(volume discounts and product returns)

5. Telecommunications(rebates)

Right of Return

Right to return granted to customers for merchandise when customers are not satisfied or unable to sell the merchandise.

1. Not a performance obligation

2. Represents a potential failure to satisfy the original performance obligation to provide goods that the customer wants to keep.

3. Sellers estimate returns by creating contra sales revenue account and liability

4. Sales Returns is a contra revenue account

5. Seller also reduces COGS and records an asset, "inventory--estimated returns

6. at the end of each reporting period, make adjustments to sales return and refund liability


when a company is providing the good or service to the customer.

1. Controls goods or services before they're transferred to customers. Is evident if:

  • Principal has primary responsibility for delivering a product or service
  • vulnerable to risks associated with holding inventory, delivering the product, and collecting payment from customer.

2. Performance obligation is to deliver goods and services.

3. Records revenue equal to the total sales price paid by customers as well as COGS equal to the cost of the item to the company.


Arranging for another company to provide the good or service.

1. Performance obligation is to facilitate a transaction between a principal and customer

2. Facilitator that receives commission for helping sellers provide goods and services to buyers

3. Records as revenue only the commission it receives on the transaction


Allow the customer to use the seller's intellectual property by paying a licensing fee.

1. Right of use

2. Right of access

3. sometimes isn't distinct from other promised goods or services.


Grants a franchisee the right to sell its products and use its name for a specified period of time.

1. Provides initial start-up services

2. provides ongoing product and services


Quite often an individual that is granted a license to use a franchisor's name and sell its products for a specified period of time.

Bill-and-hold arrangement

Exists when a customer purchases a good but requests that the seller not ship the product until a later date

1.Revenue recognition usually occurs at delivery for this type of arrangement.

2. Can recognize revenue prior to deliver only if:

  • customers can be concluded to control the product
  • there is a good reason for the bill-and-hold arrangement
  • the product is specifically identified as belonging to the customer and is ready for shipment


1. Consignor physically transfers the goods to the consignee, but the consignor retains legal title.

2. If buyer is found, consignee remits the selling price less commission and approved expenses to the consignor.

3. If the consignee can't find a buyer within an agreed-upon time, then the consignee returns the goods to the consignor.

4. Revenue Recognition occurs upon sale to an end customer in a consignment arrangement

Contract Liability

label given to deferred revenue or unearned revenue accounts

Accounts Receivable

1. Recognized if the seller has an unconditional right to receive payment(which is the case if only the passage of time is required before the payment is due).

2.Recognized as well as a contract asset when a seller satisfies a performance obligation before the customer has paid for it.

Contract asset

Seller satisfies performance obligation, but payment depends on something other than the passage of time.

Construction in Progess(CIP)

Asset account equivalent to work-in-process inventory for a manufacturer.

Billings on Construction contract

A contra account to the CIP asset, which is where periodic billings are credited to.

Asset turnover ratio

Net sales/avg total assets

indication of how efficiently a company uses its assets to generate revenue

Receivables turnover ratio

Net sales/avg a/r(net)

indication of a company's efficiency in collecting receivables

shows the number of times the average a/r is collected.

A decline in the ratio could be an indication of customer dissatisfaction or that the firm is granting extended(too lenient) credit terms in order to maintain customers.

Average Collection Period

365/Receivables turnover ratio

number of days average a/r balance is outstanding

Inventory Turnover Ratio

1.number of times the average inventory balance is sold during a period.

2. Indicates how quickly inventory is sold

3. COGS/avg inventory

4. High ratio could indicate a superior sales force or a successful advertisement campaign; also a relatively low inventory level, which indicates either efficient inventory management or stockouts and lost sales in the future.

5. low ratio indicates that too much capital may be tied up in inventory; overstocking, obsolete items, poor marketing and sales efforts

6. The more a company turns over its inventory, the lower the investment it has to have in inventory for a given level of sales.

average days in inventory

365/inventory turnover ratio

number of days it normally takes to sell inventory

Profit Margin on sales

1. Net income/net sales

2. indicates the portion of each dollar of revenue that is available after all expenses have been covered

3. offers a measure of the company's ability to withstand either higher expenses or lower revenues

4. A low profit margin can be compensated for by a high asset turnover rate and vice versa

Return on Assets(ROA)

1. Net income/average total assets

2. Because total assets are partially financed with debt and partially by equity, this is an inclusive way of measuring earning power that ignores specific sources of financing.

3. PM*TAT=ROA; profitability

4. PM High and TAT low in some industries such as manufacturer of specialized equipment

5. PM low and TAT high in some industries, such as grocery stores

Return on Shareholder's Equity

1. net income/shareholder's equity



DuPoint framework

Breaks ROE into three key components:

1. Profitability; measured by profit margin

2. Activity; measured by asset turnover

3. Financial leverage; measured by equity multiplier

ROE= Profit margin*asset turnover*equity multiplier