Chapter 5 – Revenue Recognition and Profitability Analysis

The proper timing of income recognition is important to ensuring the fair presentation of a company’s results of operations.  At it’s most basic level, income is recognized at the point of sale or delivery.  However, there are times when the point of sale or delivery may not be appropriate.

The Financial Accounting Standards Board or FASB issued two criteria that must be met before revenue can be recognized:  (1) the earnings process is complete or virtually complete; and (2) there is reasonable certainty as to the collectibility of the asset to be received (usually cash).

The Securities and Exchange Commission (SEC) issued four additional criteria:  (1) persuasive evidence of an arrangement exists; (2) delivery had occurred or services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured.

Chapter 5 looks at situations where revenue recognition could occur prior to delivery, at delivery or after delivery.  In the percentage of completion method, revenue is recognized prior to delivery or prior to the completion of a long-term project.  This is contrasted with the completed contract method wherein revenue is recognized when the long-term project is complete.  Where collectibility of the asset to be received is in question, a company might use the installment sales method or the cost recovery method.

The narrated PowerPoint lecture for this chapter has been broken into two parts.  Part 1 focuses on the revenue recognition criteria and the installment sales method versus the cost recovery method.  Part 2 looks at revenue recognition for long-term projects using the percentage of completion method and the completed contract method.  The narrated PowerPoint lectures and solutions to selected exercises and problems can be found here.  This content can be viewed on both a computer and an IOS/Android device.