CHAPTER 230 Revenue Recognition and Profitability Analysis After studying this chapter, you should be able to: ● LO5–1 State the core revenue recognition principle and the five key steps in applying it. (p. 232) ● LO5–2 Explain when it is appropriate to recognize revenue at a single point in time. (p. 234) ● LO5–3 Explain when it is appropriate to recognize revenue over a period of time. (p. 235) ● LO5–4 Allocate a contract’s transaction price to multiple performance obligations. (p. 237) ● LO5–5 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. (p. 241) ● LO5–6 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. (p. 244) ● LO5–7 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. (p. 251) ● LO5–8 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. (p. 254) ● LO5–9 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. (p. 256) ● LO5–10 Identify and calculate the common ratios used to assess profitability. (p. 269) 5 LEARNING OBJECTIVES In Chapter 4 we discussed net income and its presentation in the income statement. In Chapter 5 we focus on revenue recognition, which determines when and how much revenue appears in the income statement. In Part A of this chapter we discuss the general approach for recognizing revenue in three situations—at a point in time, over a period of time, and for contracts that include multiple parts that might require recognizing revenue at different times. In Part B we see how to deal with special issues that affect the revenue recognition process. In Part C we discuss how to account for revenue in long-term contracts. In Part D we examine common ratios used in profitability analysis. In an appendix we consider some aspects of GAAP that were eliminated by recent changes in accounting standards but that still will be used in practice until the end of 2016. OVERVIEW
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