Friedlan4e SM Ch04 Solutions

8/10/2019 Friedlan4e SM Ch04 Solutions

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CHAPTER 4

Income Measurement and the Objectives of Financial Reortin!

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Q4-1.No, its rarely possible for one set of financial statements to satisfy all objectives of financialreporting, since most companies have many objectives, some of which that are contradictory.The prsit of ta! minimi"ation, which is of some importance to all companies, necessarilysacrifices most other objectives, particlarly the evalation of management performance, incomema!imi"ation, or income smoothing, which sally are important for a pblicly traded company.#or private companies higher net income might be desirable if financial statements have to beprovided to ban$ers whereas minimi"ing ta!es wold be served by legitimately reporting a lowernet income.

Q4-%.

There is no &most important' objective of financial reporting. This (estion mst be assessed inthe conte!t of each individal entity. #or a small private company with few e!ternal sta$eholdersdemanding information therefore income ta! minimi"ation is probably the most importantobjective. #or a company rgently re(iring a loan the most important objective is providinginformation that increases the li$elihood of obtaining the loan)perhaps by reporting higher netincome or providing detailed cash flow forecasts. #or senior managers with a net income-basedbons plan the most important objective might be receiving a large bons. #rom a sta$eholdersperspective the most important objective is the one that satisfies that sta$eholders informationneeds.

Q4-*.

+rodct costs can be reasonably attached to the specific revenes they helped generate and aree!pensed as cost of goods sold when the revene is recogni"ed. +eriod costs cant be readilymatched to specific revenes and is e!pensed in the period when the cost occrs. n theory, thematching concept re(ires that all costs be matched to the revene they help generate. This is oneof the goals of accral acconting. n practice, it can be very difficlt to match many costs to therevenes they helped earn. #or e!ample, for many entities it can be difficlt to match costs li$etilities, administrative salaries, depreciation, and advertising to specific revenes.

Q4-4.evene recognition refers to choosing the time period when the revene is recorded on theincome statement and inclded in the calclation of income.

Q4-.The recognition of revene either increases an asset or decreases a liability. f a sale is made oncredit, acconts receivable is increased /debited0 when the revene is recogni"ed. f a cash sale ismade then cash is increased /debited0 when the revene is recogni"ed. f the cstomer paid inadvance for the good or service and an nearned revene liability was set p when the paymentwas received, when the revene is recogni"ed the nearned revene liability is decreased

ohn #riedlan,Financial Accounting: A Critical Approach, 4thedition +age 4-12oltions 3anal

opyright 5 %61* 3c7raw-8ill yerson 9td.


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/debited0. n all cases, recognition of revene will reslt in an increase in retained earnings/credit0. :hen an entity recogni"es revenes its net assets /assets ; liabilities0 increase.

Q4-


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Q4-D.There can be considerable latitde for when to recogni"e revene, even within the #2E=2+Fstandards and the specific facts of the sitation. f alternatives e!ist after considering theconstraints and the facts the objectives of the managers wold inflence how they choose to

recogni"e revene. = firm might prefer to recogni"e revene as late as permitted, if postponingincome ta!es is the most important acconting objective. =lternatively, if a significant portion ofmanagements compensation was a bons based on income, revene recognition at an earlierpoint wold be preferred. n general, given the latitde and fle!ibility available, the objectivewold inflence when managers choose to recogni"e revene.

Q4-16.onstraints are formal limitations on the range of choices available with regard to accontingalternatives for a particlar event or transaction, sch as those imposed by #2E=2+F, laws,contracts, and so on. #acts are the economic circmstances that srrond an event. The facts maylead strongly to a conclsion that only one alternative wold be acceptable to a $nowledgeable

observer. #or e!ample, if a barber shop provides a hairct for cash, the only credible revenerecognition policy is when the service is provided. n other cases, when the facts are moreambigos and sbject to interpretation, more than one reasonable alternative might e!ist.Gbjectives arise from the prposes that the preparers of the financial statements have for thestatements. They arise from a consideration of the most important sers of the statements and theanticipated decisions that may be inflenced by the financial statements. onstraints, facts, andobjectives mst be considered when ma$ing an acconting choice becase they each may serveto limit or gide the choice. They mst be considered in order, with constraints being consideredfirst, then facts, and only if more than one alternative e!ists after conslting the facts canobjectives be considered.

Q4-11.3atching is the process of recording and reporting e!penses in the same period as the revenesthose e!penses helped earn are recorded and reported. F!amples of matching incldedepreciation of property, plant, and e(ipment, the cost of inventory sold, the cost of labor,estimated warranty costs, bad debts /many other e!amples cold be provided0. 3atching isimportant when income is determined for prposes sch as measring performance, evalatingmanagement or predicting ftre profitability becase performance re(ires the association ofthe economic benefits and costs an entity incrs. 3atching can be difficlt becase thecontribtion a particlar e!penditre ma$es to earning revenes in a period can sometimes bevery difficlt to determine. #or e!ample, its not clear how a delivery vehicle contribtes to theearning of revene.

Q4-1%.=cconting is a representation of the economic activity of an entity, not the economic activityitself. Fconomic events and transactions, sch as delivery of prodcts or services to cstomers,payment or receipt of cash, signing of contracts, or changes in the vales of assets, arentaffected by how an entity does its acconting. =ll thats affected is how those economic eventsare reported. 8owever, while acconting doesnt affect the economic activity of an entity, it canhave economic conse(ences. That is, the decisions and wealth of sta$eholders, inclding the

ohn #riedlan,Financial Accounting: A Critical Approach, 4thedition +age 4-*2oltions 3anal



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managers, bt it wold come at the e!pense of less informed people preparing the financialstatements. Gversight of financial statement preparation might help mitigate the self-interestedbehavior of managers. #or e!ample, adits of financial statements by independent third partiescold serve this prpose provided the aditors carry ot their fnctions properly. 8owever, thereis clear evidence that aditors dont always do that. #or e!ample, =rthr =ndersens demise in

the early %666s and controversies srronding the independence of aditors call this approachinto (estion.

Q4-1@.=llowing the se of a single revene recognition point wold eliminate ncertainty andjdgement abot when revene is recogni"ed. n that sense the statement wold be more reliablebecase there wold be no confsion abot how an entity was recogni"ing revene. 8owever,re(iring a niversal revene recognition point woldnt ma$e financial statements more seflof more relevant for decision ma$ing. 8ow sefl and relevant financial statements are dependson who the ser is and the decision he or she has to ma$e. #le!ibility in an acconting systemcan ma$e financial statements more relevant by allowing managers to select acconting methods

most sitable for the sitation. 2imilarly, financial statements are intended to reflect the financialposition and economic activity of an entity. = niversal method of revene recognition may notniversally captre the economic activity of an entity. Hifferent methods can be appropriate fordifferent circmstances. Gn the other hand, by specifying when revene mst be recogni"ed, theability of managers to e!ercise their self-interest throgh the acconting choices they ma$e ismitigated.

Q4-1A1. 2ignificant ris$s and rewards ofownership have been transferredfrom seller to byer

This is a performance criterion which means the byer nowbears the ris$ and enjoys the rewards associated withreceiving or owning the prodct or service.

%. The seller has no involvement orcontrol over the goods sold

This is also a performance criterion in that the seller is nolonger involved in the management or decision of how thegoods are being sed.

*. The amont of revene can bereasonably measred.

ts necessary to $now the amont of revene that will beearned. That is, the amont that the cstomer has agreed topay mst be $nown.

4. The costs re(ired to earn therevene can be reasonably measred.

ts necessary to $now the costs that will be incrred to earnthe revene. This criterion is necessary if e!penses aregoing to be matched to revene. osts inclde not onlythose incrred to the time the revene is recogni"ed, btalso costs related to the revene that will be incrred in the

ftre.

. ollection of payment is probable. #or revene to be recogni"ed there mst be a reasonablee!pectation that payment will be received. f the reveneisnt collected, there is no economic benefit.




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Q4-1D.The effect of recogni"ing revene at one point in time rather than another can have significantimplications for the nmbers that appear in the financial statements and economic conse(encesfor those who prepare financial statements and for sta$eholders who se the financial statements.

:hen revene is recogni"ed can affect wealth distribtion by affecting the amont of ta! anentity pays, the bons managers receive, the amont byers pay for an entity, and so on. naddition, the sers perspective regarding the profitability and performance of the entity may beaffected. Note that how or when revene is recogni"ed doesnt affect the actal nderlyingeconomic activity of the entity. Gnly the representation of that activity is affected.

Q4-%6.To se the percentage-of-completion method its necessary to estimate the total costs that will beincrred over the contract, the amont of revene that will be earned, and the percentage of theproject that has been completed on the financial statement date. There also has to be a reasonablee!pectation of payment. f any of these re(irements isnt met, #2 re(ires entities to se the

"ero-profit method.

Q4-%1.= gain arises when a firm sells an asset that it doesnt sally sell in the ordinary corse ofbsiness /i.e. not inventory0 for an amont greater than the carrying amont at the time of thesale /carrying amont I cost ; accmlated depreciation0. f the sale is for less than the carryingamont, there is a loss. 7ains and losses are reported separately from revenes and e!penses onthe income statement becase they dont reflect the normal contining operations of the bsiness.eporting gains and losses separately is important so that sta$eholders can nderstand theamont of revene the entity is generating from its ordinary activities. The amonts are typicallyshown &net' on the financial statements /the gain or loss is reported on the income statement, notthe selling price less the carrying amont0.

Q4-%%.The gains and losses are shown separately becase they arent part of the sal operatingactivities of the bsiness. To inclde these transactions with revene earned from the entitysordinary bsiness activities wold be misleading to the sers of financial statements. #ore!ample, investors often loo$ to the gross margin percentage on the income statement as animportant indicator of the companys ability to offer a prodct that is valed by cstomers andcompare that percentage to that of other firms in the same indstry. nclding gains and losses inrevene wold distort the gross margin percentage. 2imilarly, year-to-year trends in revenes aredistorted if non-operating transactions are inclded. =lso, inclding sales of incidental assets inrevene distorts the si"e of the bsiness by overstating the amont of sales the entity has in itsprimary bsiness activity. n each case, sers ability to assess the performance of the entity andto predict ftre performance is distorted.

Q4-%*.The two factors are the information needs of sta$eholders and the self-interest of managers. Theinformation needs of sta$eholders are a major reason for financial reporting. 2ta$eholdersre(ire information for decision ma$ing and acconting information shold help sta$eholders

ohn #riedlan,Financial Accounting: A Critical Approach, 4thedition +age 4-nbndle the prodcts and recogni"e the networ$ installation once its complete/delivered installed0, training as its provided over the si! months on a percentage ofcompletion basis and service over the five year term on an appropriate percentage ofcompletion basis.

%0 ecogni"e revene when the system is sold /at delivery0. t wold be necessary to accrethe e!penses associated with the training and service.

ohn #riedlan,Financial Accounting: A Critical Approach, 4thedition +age 4-*62oltions 3anal



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Total Pale of the ontract %,666,666

#air Pale of Networ$ 2ystem 1,66,666

#air Pale of training 1%,666

#air vale of 2ervices @6,666

Total #air vale %,*@,666

Totals Jear 1 Jear % Jear * Jear 4 Jear

Otion .

evene from Networ$ 2ystem

/%,666,666 ! 1,66,666 E %,*@,6660 1,%


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+4-.a.7iven that this is a long term contracts two possible options to recogni"ing the revene sing thegradal approach are as followsB

10 ecogni"ing the revene evenly as time passes or%0 ecogni"ing the revene based on the ratio of estimated cost sing the percentage-of-completion method.

Jear 1 Jear % Jear * Jear 4 Total

Otion . ,666 ,666 ,666 ,666 %6,666

Otion /

Jear 1 W 1K *,666.6

Jear % W %6K 4,666.6

Jear * W *6K


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+4-


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/2.3 /2. /2.5 /2.6 Total

osts incrred 6 A,666,666 4,A66,666 6 1%,A66,666

eveneecogni"ed 6 A,666,666 1%,666,666 6 %6,666,666

onstrctionosts F!pensed 6 A,666,666 4,A66,666 6 1%,A66,666

7ross 3argin 6 6 @,%66,666 6 @,%66,666

Gther e!penses 1,


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the information in the financial statements differently depending on how its presented, btthe nderlying economic reality isnt affected.

+4-A.a. and b.

Revenue Reco!nition 0ased on Percenta!e,of,Comletion

/2. /2.5 /2.6 /2/2 Total

osts incrred 6 %1,666,666 1%,


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Revenue Reco!nition 0ased on Cash Collection

/2. /2.5 /2.6 /2/2 Total

ash collected 16,66,666 1*,*66,666 %1,666,666 @,@66,666 %,66,666

+ercentage collected %6K %K 46K 1K 166K

evene ecogni"ed 16,66,666 1*,*66,666 %1,666,666 @,@66,666 %,66,666

onstrction osts F!pensed


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+4-D.a.

i0 evene recogni"ed on +rodction

Assets 89: 1iabilities 8;: $hareholder E


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ii0 evene recogni"ed on delivery



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iii0 evene recogni"ed on cash collection



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b. #inancial 2tatements based on revene recogni"ed at prodctionB

Antler Manufacturin! 1td'

0alance $heet

As of >ecember ?.@ /2.

Assets 1iabilities and $hareholders Eecember ?.@ /2.

EF at beginning -

Net ncome 46,666

9ess Hividends -

R=E at end 46,666




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#inancial 2tatements based on revene recogni"ed at deliveryB


0alance $heet



EF at beginning -

Net ncome 6,666

9ess Hividends -

R=E at end 6,666




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#inancial 2tatements based on revene recogni"ed at time of collectionB


0alance $heet



EF at beginning -

Net ncome /%6,6660

9ess Hividends -

R=E at end /%6,6660

ohn #riedlan,Financial Accounting: A Critical Approach, 4thedition +age 4-4%2oltions 3anal



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c.

+rodction Helivery ollection

evene %,A66,666 1,A66,666 1,66,666

ost of 2ales 1,


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+4-16.

/i0 ecogni"e revene when goods are prodced



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/ii0 ecogni"e revene when merchandise is delivered to cstomers



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/iii0 ecogni"e revene when cash is collected



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#inancial 2tatements based on revene recogni"ed at prodctionB

in-ora Manufacturin! 1td'

0alance $heet

As of >ecember ?.@ /2.5

Assets 1iabilities and $hareholders E


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in-ora Manufacturin! 1td'

0alance $heet




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0alance $heet




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ost of 2ales


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+4-11.evene can be recogni"ed in a bill and hold arrangement if all conditions of the sale have beenmet e!cept for delivery, and the terms of delivery have been specified. n evalating or ta$ing pthis (estion emphasis shold be placed on stdents ability to interpret the terms of thetransaction and to apply the revene recognition criteria. ts not intended that stdents become

intimately familiar the specifics of bill and hold acconting bt that they nderstand thatdifferent bsiness arrangements can reslt in different acconting treatments.a0 The terms of this arrangement sggest that :andby can recogni"e the revene in fiscal

%61@. The rights and ris$s of ownership have for the most part been transferred becasethe cstomer is flly committed to prchase the frnitre based on the contractal termsand confirmation of acceptance of the goods by the cstomer. The cstomer clearly planson accepting the goods and the delay in shipping is simply a logistical matter that isresolved by :andby $eeping the merchandise for a short period of time. Gther facts thatspport the early recognition nder the bill and hold agreement inclde the segregation ofthe inventory that is labelled and assigned to the specific cstomer.

b0 2itation b0 is (ite different from 2itation a0. n b0 the cstomer isnt committed to by

the merchandise and the price is determined by the mar$et price when the goods areactally prchased. =s a reslt the ris$s and rewards of ownership havent transferredsince changes in demand for the cstomers prodcts, changes in price, or for any otherreason the cstomer cold decide not to order. t isnt, therefore, appropriate to recogni"ethe revene in fiscal %61@. t wold be more appropriate to recogni"e the revene when/if0 the frnitre is delivered to the cstomer.

c0 This isnt a bill and hold arrangement. The cstomer has placed an order bt themerchandise hasnt been prodced. = bill and hold arrangement re(ires that everythingregarding the sale is complete, e!cept for delivery. n this case only an order has beenmade. evene shold be recogni"ed when the order is delivered, provided all therevene recognition criteria are met at that point.

+4-1%./NGTFB #or this (estion stdents arent e!pected to $now what #2 or =2+F re(ire. Theyshold apply the revene recognition criteria to the facts to develop a reasonable soltion to thesitation.0 This is consignment sale. The owners of the clothing have an arrangement with :eart =gain 2am to act as a sales agent. =lthogh :ear t =gain has to care, store and sell the goodsit has no responsibility for items that dont sell and can retrn the articles bac$ to the owner.Therefore the ris$ and rewards of ownership havent changed hands even thogh control andmanagement has. The clothing remains property of the owners ntil they are sold, thsperformance hasnt occrred ntil the items are sold to a third party. Therefore :ear t =gain2am sholdnt recogni"e the revene ntil an article is sold. =t this time ris$ and rewards aretransferred, :ear t =gain 2am no longer retains management of the goods, revene and cost are$nown and collection has been made. :ear t =gain 2am shold recogni"e its 6 percent share ofthe amont received, not the fll amont.

:ear t =gain 2am shold inclde in revene cash received for clothing items sold bt notcollected. f the arrangement with cstomers re(ires collection by a certain date then amontsnot collected after the date shold be ta$en into revene. f no time period is specified then a




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basis for estimating the amont that wont be collected is re(ired. =monts owing shold berecorded as a payable on the balance sheet.

+4-1*./NGTFB #or this (estion stdents arenYt e!pected to $now what #2 or =2+F re(ire. They

shold apply the revene recognition criteria to the facts to develop a reasonable soltion to thesitation.0 +ossible times to recogni"e revene are when cstomers ma$e the down payment orwhen the fll amont is paid and delivery occrs. There is no contract so the jeweller has norecorse for obtaining amonts owing. :hen the jeweler accepts cash it isnt providingmerchandise so ris$s and rewards havent shifted to the byer. Gn the other hand the jeweler hasset aside the merchandise for the cstomer. There are ncertainties abot collection bt the e!tentto which people dont flfill their obligations can be estimated. Sey is actal delivery, whichoccrs when payment is received in fll. f 1A6 days pass and the cstomer doesnt pay then thedealer can recogni"e the down payment as revene. Refore this time performance hasntoccrred and the down payment is nearned revene. f #2E=2+F isnt a constraint anargment cold be made to recogni"e the down payment as revene becase #air can $eep the

money if the cstomer doesnt complete the prchase. t wold be difficlt to match costs to thisrevene /becase the inventory may never actally be transferred to the cstomer0 bt that mightnot matter if #2E=2+F isnt a constraint.

+4-14./NGTFB #or this (estion stdents arenYt e!pected to $now what #2 or =2+F re(ire. Theyshold apply the revene recognition criteria to the facts to develop a reasonable soltion to thesitation.0 Normally 3olanosa wold recogni"e the revene when the goods are delivered. Thisdeal is different than the normal type of arrangements 3olanosa ma$es with its cstomersbecase the cstomer has the right to retrn any and all goods p ntil 3arch 1. :hen therevene on this sale is recogni"ed is important becase it appears to increase net income abovethe threshold for the 166,666 bons. The $ey (estion is whether the ris$s and rewards ofownership transfer on delivery or at a later date /after 3arch 1, %61A0. 3olanosa bearsconsiderable ris$ becase its responsible for any and all items the cstomer chooses to retrn.This problem can be addressed if the amont that will be retrned cold be estimated, bt thismay be problematic with a new cstomer in a new mar$et. =lso important is that this is annsal arrangement. The transaction is on terms not given to other cstomers so sing the samebasis of revene recognition may not be appropriate. The fact that the byer has negotiated thisagreement shows that it isnt sre if they can sell the goods. =fter 3arch 1 all the ncertaintyabot the amont that will actal be sold is resolved and recognition can ta$e place. =s a resltof the ncertainty abot the (antity that will be retrned, the amont of revene, the cost of thegoods sold, and the amont of cash that will be collected in ncertain. f #2E=2+F isnt aconstraint then recognition cold occr earlier, perhaps when the goods are shipped, since thathas been the cstomary time for recogni"ing revene and is the point where control of the goodshas been transferred from the seller to the byer.

ohn #riedlan,Financial Accounting: A Critical Approach, 4thedition +age 4-%2oltions 3anal



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+4-1./NGTFB #or this (estion stdents arenYt e!pected to $now what #2 or =2+F re(ire. Theyshold apply the revene recognition criteria to the facts to develop a reasonable soltion to thesitation.0

a0 The most obvios ser of Hthils financial statements is the pblic shareholders, who willse the statements for stewardship, performance evalation, and prediction prposes. The*K shareholder cold be a ser /particlarly if he has some $ind of bons plan0 althoghhe woldnt need the statements to find ot what was going on, since he manages thecompany. No information is given that there is a bons plan thogh. = wold be a serto chec$ for compliance with the ncome Ta! =ct. 9enders cold be sers if there are loansotstanding of if borrowing will be needed in the ftre.

b0 Gbjectives cold inclde income smoothing or income ma!imi"ation for the benefit ofpblic shareholders or ta! /income0 minimi"ation. :ith a smoothing or income increasingobjectives management might try to show that management is doing a good job or toprovide satisfactory acconting measres of retrn. Ta! minimi"ation conserves cash in the

entity and is in conflict with income ma!imi"ation efforts.c0 Hifferent ran$ings are possible depending on stdents interpretation of the facts. 2tdentsshold be rewarded based on the (ality of the spport for their ran$ings, not the ran$ingitself. #or e!ample, the FG and major shareholder might want to emphasi"e incomema!imi"ation or income smoothing to maintain the vale of his shares in the company.

d0 There are two possible treatments for the campaign costsB e!pense or capitali"e. To jstifycapitali"ing the costs its necessary to arge that the amont meet the definition of an asset,in particlar in this case that there is ftre benefit. The ftre benefit wold be that thecosts will contribte to revene generation in ftre periods. This is a reasonable argmentbecase of the sbscription revene that will be earned in %61A /and possibly beyond0. fthe costs are capitali"ed there is the (estion of how to amorti"e them.

F!pensing the cost wold satisfy the ta! minimi"ation objective. apitali"ing andamorti"ing the cost on some basis wold increase income in %61@ /or %61A if they were notflly e!pensed in that year0, which wold help the income smoothingEincomema!imi"ation objective. #or ta! prposes the ideal treatment wold be to e!pense the fllamont in %61@ /and this may be allowable for ta! prposes0. #rom a financial reportingstandpoint there isnt strong spport for e!pensing in %61@. The sbscriptions come intoeffect in %61A and the amont of revene in that year alone e!ceeds the cost of finding thenew sbscribers. Ths matching wold arge for e!pensing commencing in %61A. Then the(estion is whether the


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beyond %61D. 2tdents can propose different ways of spreading the cost over time. The $eyis that stdents provide a reasonable rationale for their proposed treatment.

+4-1


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delivery might be appropriate since the e!act amont of revene wont be $nown.#rthermore, collection is a grey area ; its nli$ely that companys prchasing large(antities of metal will defalt on their payments, bt as Notigi is a new company there is aris$ that they cold e!tend credit to cstomers inappropriately.

#2 isnt listed as a constraint in this case, bt de to the high costs involved with miningand the professional natre of the owners following #2 may be re(ired. f #2 isnt aconstraint then recogni"ing revene at e!traction cold provide sefl information forsta$eholders provided the amont of refined metal cold be reasonably estimated. Theseoptions wold help to ma!imi"e income as revene cold be recogni"ed sooner.

+erformance evalation is li$ely served by recogni"ing revene once the metal is refinedbecase deliveryEsale is a minor step for a commodity. 2tewardship is also served byrecognition on refining the metal. Ta! minimi"ation re(ires delay so recognition of deliverywold be preferred.

[email protected]. +ossible objectives incldeB Ta! minimi"ation)=s a closely held private company, minimi"ing ta!es is an important

consideration. The absentee owners may be able to get additional information from =le!and Fvan and so the statements can be sed for ta! prposes.

+erformance evalation)The cosins wold probably be interested in assessing theperformance of their investment, especially those who arent involved in day-to-daymanagement of the company. Ran$ers may also be interested in performance evalation.

ash flow prediction)for the ban$ to monitor hetwynds ability to pay its loan. 2tewardship)The non-managing owners have entrsted =le! and Fvan with their assets.

They wold want information abot how those assets are being managed.

b. There are a nmber of possible ran$ings. The $ey is providing some spport for the choice.The spport for the ran$ing shold be based on the information provided in the (estion andassmptions abot the relative importance of the objectives. #or e!ample, an argment forran$ing ta! minimi"ation first cold be made by arging that as a private company the maininterest of the owners is to $eep as mch cash in the bsiness as possible, which ta!minimi"ation wold help accomplish. Gne cold go on to arge that with the small nmberof owners and the fact that they are li$ely close, information abot the performance of thecompany cold be obtained in ways other than the general prpose financial statements. ashflow prediction and other information important to the ban$ cold be arged for as mostimportant since the company has loans otstanding and may be in need of additionalfinancing becase the cash borrowed has been sed. Gther reasonably spported ran$ings arepossible.

c. +ossible revene recognition points /these wold not all be acceptable nder #2 or =2+F0

1. 2igning of contract)evenes are $nown and there is no information to sggestcollection is a problem. osts are highly ncertain given the natre of the bsiness andthat this is the companys first large job. ts hard to arge that revene is earned since ashovel hasnt yet been placed in the grond. 9ittle effort has been made yet.




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%. +ercentage-of-completion method)+ercentage-of-completion is certainly a fit herebecase this is a long-term project. =s long as costs can be reasonably estimated thismethod is acceptable /its assmed that revene is $nown /the amont is in the contract00and cash is collectable. :ith the percentage-of-completion method revene is recogni"edover the term of the contract. =gain, costs are $ey here. Fstimation of costs cold be a

problem becase this is hetwynds first large job so it may be appropriate to argeagainst this alternative on the gronds that costs are difficlt to estimate.*. ash collection)= possible choice if collection is seen as a problem. 8owever, becase

cash is received over the entire contract, costs need to be reasonably measred. This maynot be straightforward, especially given that this is hetwynds first big job. Recasepayments are made over the life of the contract, this becomes similar to a gradalapproach where the determinant of revene recognition is cash collection. =lso, cash isreceived at the inception of the contract and there is little basis for recogni"ing revene atthis point.

4. ero-profit method)if there are ncertainties that ma$e recogni"ing revene a problemover the corse of the contract #2 re(ires the se of the "ero-profit method. f the is

significant ncertainty abot the total cost of the project this method wold recogni"erevene e(al to the costs incrred in the period. evene wold be recogni"ed btincome wold be "ero.

. ompletion of the constrction)=t this point it can be assmed that revene is earnedsince constrction is done. evene is $nown since there is a contract. ts assmed thatcash collection isnt a problem. f its, the last


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osts incrred *,666,666 1,66,666 4,66,666

evene ecogni"ed *,666,666 %,AA6,666 ,AA6,666

. ompletion of the constrction - - ,AA6,666 ,AA6,666


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3any stdents will contine with a list of very marginal sers sch as employees and sppliers.:hile these parties may have access to the financial statements, its not li$ely and these sersare minor. 2tdents shold be encoraged to focs on the important sers.

b. 3r. Srajden might consider the following objectivesB

ta! postponement stewardship reporting to 3s. shtia(e

management evalation and performance evalation of the company

cash flow information for the ban$

income ma!imi"ation /to meet 3r. Srajdens personal objectives of ma!imi"ing his

bons and conveying positive information abot the company to 3s. shtia(e and theban$0.

c. #or 3r. Srajdens own interests, the determination of the bons will be a high priority. =s themanager of the bsiness, he will also be concerned with the ability of the company to obtainade(ate ban$ financing and conserve cash by postponing ta!es. The needs of the ban$ may

be satisfied by providing spplementary information on e!pected cash receipts anddisbrsements and smmary information on acconts receivable. 8e may also want to ensrethat the general-prpose financial statements show Teslin to be performing well and to be ingood financial position to satisfy 3s. shtia(e that hes doing a good job. This might beachieved by recogni"ing revene early to increase income and assets. This approach woldalso be consistent with 3r. Srajdens wish to ma!imi"e his bons. The information needs of3s. shtia(e cold be served by less formal reporting and the bons cold conceivably bedetermined otside the financial statements, althogh this approach may be inconsistent withthe contract between Teslin and 3r. Srajden. /n other words, if the general prpose financialstatements arent the basis for determining the bons, cold 3r. Srajden and 3s. shtia(eagree to an alternative0 =lso, becase 3s. shtia(e is an absentee owner, she may in fact

rely on the general-prpose financial statements to assess performance althogh as the soleowner she cold demand whatever specific reporting she wanted. n theory, the mostvalable objective wold be to minimi"e ta! becase it wold free p cash for the companyand ths be beneficial to 3s. shtia(e. :ithot $nowing the financial strength of thecompany, its difficlt to assess the importance of the ban$ to the company. 8owever,emphasi"ing the ban$s information needs will also serve to increase his bons. #rom thisanalysis, a nmber of reasonable ran$ings can emerge. ncreasing /ma!imi"ing0 income, ta!minimi"ation, or performanceEmanagement evalation cold be spported. /2tdents have toprovide a ran$ing to lead their analysis of the revene recognition alternatives.0

d. The critical events that might be considered areB

signing of the contract as containers are prodced

delivery of the containers

collection of the cash

end of the contact /once all containers are delivered0.

ohn #riedlan,Financial Accounting: A Critical Approach, 4thedition +age 4-A2oltions 3anal



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e. >nless the ban$ insists on adited financial statements, #2E=2+F isnt li$ely to be aconstraint on the acconting choices /althogh ban$s wold probably want #2E=2+F evenif the statements werent adited0. The most significant fact is the ncertainty arond theamont of the penalty that may be assessed. learly, costs cant be $nown with certainty ntilthe contract is completed in fll. =ssming that this particlar contract is well within the

competence of the company and there are no spplier or labor ncertainties, the probabilityof penalties may be considered to be low. n that case, there may be no objection torecogni"ing revene as the containers are delivered. Helaying revene recognition ntil thecontract is flly completed doesnt seem necessary nless the penalties are totallynpredictable, althogh it wold be attractive to redce income. =lthogh it woldnt li$elybe allowable nder #2 or =2+F, recogni"ing revene when the containers are prodcedshold be considered. =t that point there is little ncertainty abot costs /save the potentialpenalty, and if prodction gets way ahead of delivery, the li$elihood of a penalty isdiminished0, revene is $nown and collection is virtally certain as long as there is noproblem with the containers sch that the government rejects them. +rodction wold li$elynot be acceptable according to =2+FE#2 becase the company still has cstody of the

containers and therefore hasnt transferred the ris$s and rewards of ownership /and this isnta bill and hold arrangement0. ash collection has merit if collection is an isse, which its notin this case since the government is a reliable debtor. Note that cash collection isnt aconservative approach becase some cash is received in advance of delivery. Hisclosre ofthe contract wold be valable to the ban$ becase it provides important information abotftre cash flows. ecogni"ing revene when the contract is signed woldnt be allowablender #2E=2+F becase performance hasnt occrred.

Note that stdents are e!pected to weigh the isses raised in e. to provide a recommendationthat is tied to the primary objective/s0 they ran$ in d.

+4-1D.a. +ossible objectives of acconting areB

Ta+ minimi(ation, particlarly since the income ta!es paid by each partner are directlydetermined from the amont of income that is reported by the partnership. The preferencehere wold be to pay less ta! by reporting lower income.Income ma+imi(ationDpartners might want to increase the amont they each draw from thefirm. The higher the net income, the higher the draw. 2ome partners might prefer lowerincome to defer ta!es. The preference of individal partners will depend on their cashsitation and needs. #rom the firms perspective, income that was close to cash /not a lot ofaccrals that ma$e cash and income very different0 wold be helpfl becase if revene wasaccelerated, the firm wold have to borrow money to ma$e payments to the partners, whichwold be costly to the firm.Mana!ement evaluation@ since the managing partner is more directly involved in managingthe company than others, there will be a need for accontability to the other partners. #or thisobjective, the emphasis wold be the accrate measrement of the reslts of the year. Themanaging partner might want to enhance the apparent performance of the firm so that theother partners wold be satisfied with hisEher stewardship.

ohn #riedlan,Financial Accounting: A Critical Approach, 4thedition +age 4-D2oltions 3anal



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Performance evaluation=fair valuation of firmDn this case, the focs is on determiningnetrally the income that was earned dring the year. The implications may be significant ifpartners join or leave the firm. To illstrate, sppose the firm adopts acconting policies toredce income early in the companys history. The effect will be that the income will beoverstated later, benefiting the partners who join the firm later. 2imilarly, partners joining the

firm will pay too little for their share and partners leaving will receive too little. #airnesstherefore re(ires an nbiased measrement of income.

+roviding information to the ban$ can probably be accomplished by providing the samefinancial statements along with cash flow forecasts.

There are a nmber of conflicts. Ta! minimi"ation conflicts with income ma!imi"ation. Thepartners face a trade-off becase higher income reslts in a larger draw bt also higher ta!es.Ry minimi"ing ta!es, the wealth of the firm and therefore the partners is higher bt theamont of cash they have in the year is lower. Hifferent partners may have differentpreferences in this regard. +artners who are cash poor might be willing to pay higher ta!es to

get access to after ta! dollars. Gthers wold prefer to save the ta!. ncome ma!imi"ation andta! minimi"ation also conflict with management evalation and determining the amontincoming and otgoing partners payEreceive to enterEleave the partnership. Gther conflictscan arise depending on who has control over the acconting /managing partner verss acommittee representing all partners0. #or e!ample, the managing partner may prefer incomeincreasing or smoothing acconting choices whereas the partners might prefer fairrepresentation of activity for management evalation prposes.

b. 2ince the income that is distribted to the partners is presmably the primary sorce ofincome for each partner, the measrement of income for the period will be of primaryimportance. The firm wold want the amont of income to reflect the economic gains dringthe period. 2ome consideration might be given to actal cash flows since payments based onaccral earnings may be distant from the actal cash collected and it might be necessary forthe partnership to borrow to ma$e the re(ired payments. Ta! postponement will besecondary for reasons e!plained in part a. =ssming the law firm is reasonably sccessfl,there shold be no significant pressre to bias the financial statements to inflence thedecisions of the ban$. #inancial statements prepared as netrally as possible to measre theincome for distribtion to partners shold also reflect fairly well the performance of themanaging partner. /This isnt the only possible ran$ing. Hifferent analyses cold yield adifferent ran$ing.0

onstraintsB n general, partnerships arent constrained by #2E=2+F. The onlye!ternal sers of the financial statements that cold insist that the financial statementscomply with #2E=2+F wold be the ban$ and prospective partners. 2ince its nli$ely thatthe law firm wold be highly leveraged, the ban$ wold probably not re(ire aditedfinancial statements. Gn the assmption that the ban$ wont have the power to insist onadited statements, we can conclde that #2E=2+F wont be a constraint on the accontingpolicies. The partners may want adited statements if they dont have ade(ate access toinformation from other sorces.

ohn #riedlan,Financial Accounting: A Critical Approach, 4thedition +age 4-


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c. /Note the =2+F criteria are applied here even thogh =2+F isnt a constraint. 7iven if thereis a choice =2+F is more li$ely the standard of choice. These criteria provide a seflframewor$ for evalating revene recognition problems. Heviation from the =2+Fconstraints wold be allowable bt it wold be necessary to apply some rationale to theanalysis0.

ase /i0B #or ongoing legal wor$ that is billed at the end of a case, a nmber of alternativese!ist for when to recogni"e revene. The alternatives incldeB as the wor$ is done by thelawyers, when a case is completed, when the billing is rendered to the client, and when cashis collected.

The earliest possible time to recogni"e revene wold be as the wor$ is done. The amontearned is based on the nmber of hors wor$ed by the lawyers. The relationship betweenhors wor$ed and amont billed isnt one-to-one since billing adjstments are made based onthe jdgement of the partner in charge of the case. +erformance occrs in this way becaserevene is related to wor$ done by lawyers. The client is prchasing legal services, so an

hor wor$ed by a lawyer is revene earned by the firm /based on the lawyers charge-otrate0. osts will be $nown since the lawyers /if not partners0 will receive either a flat wage ora wage based on wor$ done. ash collection may be an isse if acconts are oftenncollected. 8owever, if the practice is fairly large, there is a basis for ma$ing an estimate.The ncertainty here is the actal amont of revene that will be billed and collected,becase of these adjstments to the amont billed. The partners may be willing to accept thisncertainty if the alternative is to wait a long time for receiving money from the practice. Thetime between recognition of revene and cash collection might be large, necessitatingborrowing to ma$e payments to the partners. =lso, partners might have to tolerate retroactiveadjstments to their payments if there were significant adjstments to the amonts billed toand paid by clients. #or prposes of determining the payments to the partners, this pointma$es some sense becase its representative of the wor$ done by the firm. The majorproblem is that cash collection may be distant in time from payment to partners, whichcreates the need for borrowing to pay /since cash hasnt yet been received0. The point is alsosefl for prposes of valing the practice becase it reflects the wor$ done by the firm andthe revene earned, which is the basis for paying partners and valing the practice. tsnecessary to ma$e assmptions regarding the ability of the firm to ma$e reasonable estimatesof ncertain amonts /billings verss hors, collections0. f these estimates are too ncertainthen the appropriateness of this point cold be (estioned. /Note that this approach woldtrigger earlier ta! payments, which wold be an isse if a stdent chose ta! minimi"ation asthe main objective.0

=t the time the bill is rendered the amont of revene is $nown since the partner has decidedthe e!act amont to bill. =s stated before, performance has occrred and the costs $nown.There remains ncertainty abot collectability. =ssming the ncollectible amonts can bereasonably estimated /this wold re(ire a significant nmber of cases so that an estimatecold be made. f there are few cases its difficlt to apply an historical average since thesmall nmber of cases wold reslt in significant variability in the actal amont that isntcollected.0 This wold be an attractive time for ta! minimi"ation and wold be allowable for



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ta! prposes. ecogni"ing revene after the bill is rendered wold be more attractive for ta!prposes bt probably not acceptable by = and nder the ncome Ta! =ct.

:hen cash is collected there is no ncertainty remaining. +erformance has occrred, reveneand costs are $nown, and cash has been collected. This is a very late point in the process bt

it wold ensre that cash is on hand for prposes of ma$ing payments to the partners.

ecogni"ing revene at the inception of the relationship between the firm and the clientwold be attractive for ma!imi"ing revene bt there is little spport in favor of this point.=t the onset of the relationship, the law firm hasnt provided any service, revenes and costsarent $nown, and collection is far off and npredictable. evene recognition at this pointtells sers little abot the performance of the firm and woldnt be sefl for valing thepartnership for incoming and otgoing partners since the ftre cash flows are highlyncertain. =s a reslt, revene recogni"ed at the onset wold involve too mch speclationand ncertainty and the measrements in the statements wold be too nreliable to basepayments to partners or for determination of the price for prchase and sale of partnership

nits.

ase /ii0 The revene from contingent fees is too ncertain to recogni"e any time beforethe amont of the settlement is determined, which wold be at the time a settlement isreached or the jdge renders a decision. :hile performance occrs gradally over the case,the amont of revene that will be earned wont be $nown ntil the end of the case. osts areincrred gradally over the case /for time pt in by the lawyers0. These cold be deferredntil the case is resolved so matching of costs to revenes can occr. Gn the other hand sincewinning /and receiving anything0 is ncertain so it might ma$e better sense to e!pense allcosts as incrred. Gbjectives wont play mch of a role in determining when the reveneshold be recogni"ed here becase of the ncertainty. ecognition of contingent fees earlierwold be pre gesswor$ and woldnt be appropriate for recogni"ing revene fordetermining payots to partners and for determining prices for prchase and sale ofpartnership interests.

ase /iii0 etainers are nearned revene when received. The revene is earned as servicesare provided by the law firm. 8owever, cash is available for distribtion to partners. fperformance is measred on a cash basis then recogni"ing the retainer as revene woldma$e sense. 2ome ncertainty e!ists if retainers are refndable /if a client as$s for hisEhermoney bac$0. Hetermining e!penses at the time the retainer is paid presents some problembecase the cost of the services provided may not be $nown so matching may be impaired.This point woldnt be attractive for ta! prposes. f the retainers are applied to casesdescribed in /i0, then the treatment described there cold be applied, althogh cash collectionwoldnt be an isse.

ase /iv0 There are three possible points to recogni"e the fee for %4E@ access to a lawyer asreveneB when the client and firm agree to the relationship /or when cash is collected, whichis assmed to be at the same time0, over the one-year term, and at the end of the one-yearterm. = case can be made for recogni"ing revene at the inception of the contractEwhen cashis paid.



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The $ey (estion is when has performance occrred)what does the law firm have to do toearn the 16,666 +resmably, at the time the agreement is reached the amont of revene is$nown /16,6660, costs are $nown /its assmed that the costs are associated with obtainingthe client, not with providing services to the client0, cash is collectable /its assmed the

client pays at the time of signing0. f what is being prchased is simply the right to accesslegal services then it can be arged that the law firm has flfilled its obligation simply byaccepting the money? any wor$ done by the lawyer has to be paid for by the client. f theprchase of access to legal service is tied to the provision of services themselves, thenearning of revene ta$es place as the services are provided. 2ince the actal ac(isition ofservices can be irreglar dring the year, a straight-line approach wold ma$e sense. n thisway, the 16,666 of revene wold be spread over the year. /This spreading wold have aneffect if the client signed p at a time other than the start of the law firms fiscal year.0ecogni"ing revene at the end of the year term is too conservative and wold be difficlt tospport nless there was some provision allowing for a refnd. =2+F wold probably preferrecogni"ing revene on a pro-rata basis, bt for prposes of determining payments to

partners early recognition is appropriate. +ro rata recognition is probably more appropriatefor valing the practice for incoming and otgoing partners. /f a stdent prses differentobjectives then a different recommendation cold be appropriate.0

+4-%6./2tdents ma$e ta$e different perspectives when addressing this gided case. Relow is a samplesoltion and therefore answers may vary. 2tdents shold be mar$ed based on how well theyspport each re(ired element0

Roard of Hirectors,

7eneral prpose financial statements created for 7raphite for the pcoming and ftre years willhave different ses depending on the particlar sta$eholders. =s owners yo are the mostimportant sta$eholder who will se the financial statements to help measre performance of7raphite, bt mst also consider the other important sers which incldeB

10 The previos owners will be sing the adited financial statements to determine howmch is owed to them at the end of each year since part of the ac(isition cost was basedon 16K of the net income for three years commencing %61@.

%0 New management at graphite will se the financial statements to determine how mchtheir bons will be paid since their performance based bons is tied to net income.

*0 The = since they will be sing financial statements to assess ta!es that the companywill owe based on the ncome Ta! =ct.

=s the board of directors yo arent directly involved in the day to day management of thebsiness and as a reslt will rely on the financial statements to measre performance and $nowhow mch yo will contine to have to pay for the recent ac(isition of 7raphite.

There are several reporting objectives that may be considered when ma$ing the selecting theappropriate acconting treatment. =s a reslt will loo$ at the boards objective as being themost important when ran$ing the objectives. /NoteB Hifferent ran$ings are possible andreasonable. 2pport for a particlar ran$ing is $ey.0



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10 ontract ompliance ; :ith the recent prchase of 7raphite the final amont to be paidfor the bsiness is still tied to the terms of prchase. =s a reslt there is a re(irement ofhaving adited financial statements according to a standard. n this case given the costbenefit of standards =2+F will be the standard sed for adited financial statements.

%0 Ta! minimi"ation ; This objective serves two prposes i0 it allow 7raphite to retain asmch cash within the operations allowed while complying with the ncome Ta! =ct ii0 byminimi"ing ta!es it also translates to minimi"ing income which will redce the prchaseprice of 7raphite for the ne!t three years.

*0 3anagement evalation and stewardship ; =s mentioned earlier the owners arentinvolved in the day to day management of the operation. =s owners yo rely on theinformation to evalate how the new management team is performing and sing theresorces entrsted to them. =lso since compensation is tied to financial performance thisobjective is very import in ensring that information is reliable for bases of evalation.

40 +erformance evalation ; This is to ensre that the information reported is separated fromnsal items that are less li$ely to occr along with matching costs and economic

benefits. The $ey is to determine which performance measre is the reslt of managementdecisions and which are a reslt of e!ternalities.

7iven that the prchase of the company was on a cash basis there are no facts as it pertains toban$ covenants as a reslt the only constraints that e!ist for 7raphite are 10 =2+F the accontingstandard recommended for adited financial reports and %0 the ncome Ta! =ct. Therefore witheach of the given scenarios the appropriate time to recogni"e revene wold be as followsB

a0 =nnal 3embership #ees- evene for annal fees may be recogni"ed when a newmember signs p and pays the fee, throghot the period for which the fee applies, orpon e!piration of the membership. 7iven that this is a relatively new program and thereis no historical information to spport the 46K refnd re(est its difficlt to recogni"erevene with provisions to recogni"e the revene pon signing p. 2ince the cstomermay still cancel the ris$ and rewards have not transferred from byer to seller despiteperformance. Therefore recogni"ing the membership revene throghot the membershipperiod is also (estionable given the loose refnd policy. =s a reslt the most appropriatetime to recogni"e revene, while being very conservative is at the end of the membershipperiod. =t this point revene is $nown along with costs and performance is complete.:hile management may arge that their estimates are sond, since their desire wold beto income ma!imi"e to receive their bonses, ta$ing a more conservative approach willmeet the objective of income minimi"ation while meeting the revene recognition criteriander =2+F. Gnce a reasonable estimate of refnds is possible recogni"ing revene overthe corse of the membership period will be acceptable.

b0 Rilders and ontractors ; There isnt a lot of options for recogni"ing revene forbilders and contractors that pay with cash or credit card. n these transactions reveneshold be recogni"ed at the point of sale since at that point collections have been made,ris$ and rewards have been transferred and both revene and costs are $nown. #or thosecontractors where credits e!tended there are two options for recogni"ing reveneB 10:hen the goods are sold or %0 when collection is made. Normally waiting for collectionis too conservative. 8owever given the facts srronding the ability of bilders the sell



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their homes, 7raphites ability to collect is also n$nown. Gne wold imagine this isntthe normal corse of bsiness to e!tent sch loose repayment terms. Ry waiting torecogni"e revene pon collection this will be in line with the objective to ta!minimi"ation and hence redcing the amont to be paid ot in the first year bt will netwith ftre years. 8owever recogni"ing revene on collections isnt a good measre of

performance since economic otflow doesnt match when benefits are reali"ed. Gnceagain management may want to recogni"e revene earlier rather than later, for bonsprposes. f a reasonable estimate the amont that will not be collected from thesebilders can be made it wold be appropriate to recogni"e the sale on delivery and recordan allowance for ncollectibles.

c0 =dvertising ampaign ; The option here is to recogni"e the amont spent as an e!penseor to capitali"e it as an asset. 3atching states that e!penses shold be matched to therevene they helped to earn. f the advertising campaign contribtes to the companysftre earnings one cold arge to capitali"e it. 3ore important nder =2+F is that tocapitali"e an e!penditre it is necessary that the amont capitali"ed meet the definition ofan asset. t is not clear whether the advertising e!penditres will give rise to any ftre

benefits? they may or they may not. learly, the advertising e!penses are incrred to earnrevene in the ftre bt it can be difficlt to attach them to any particlar ftre revene.=s a reslt its appropriate to be conservative and treat these costs as period costs ande!pense them as incrred. Therefore meeting the objective of ta! minimi"ation and theoverall redction in the first years payment.



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#$I% FI%A%CIA1 $TATEME%T$

#24-1.The phones arent really free as this is part of a &mltiple deliverable arrangement' whereby thecost of the phone is bndled with the phone service. The revene earned over the life of the

contract will li$ely cover the cost of the phone along with the cost of providing phone services tothe cstomer. :hen cstomers pay their monthly bills they are essentially paying for the phoneand service. The possible ways ogers may recogni"e revene on pac$ages that inclde a freephone and a three-year service contract are as followsB

10 ecogni"e revene monthly over the life of the plan. evene for the phone and serviceis recogni"ed over the contract term.

%0 ecogni"e the revene for the phone and service separately. evene from the phone isrecogni"ed when the cstomer receives /vale the sale at fair vale0 and recogni"e theservice revene as it is earned /as the cstomer ses the service0. The cost of the phonewold be e!pensed when the revene is recogni"ed.

mpact on the financial statementsB :ith option 1 there is an income smoothing effect becasethe revene from the phone is spread over the life of the contract. Gption % has more revenerecogni"ed at the inception of the contract. wold recogni"e more revene pfront and thereforenet income wold be higher. ecogni"ing revene sing option % will reslt in more revenebeing recogni"ed since the phone revene wold be recogni"ed when the contract is signed.

There is no right answer to a stdents recommendation. 2tdents shold ma$e theirrecommendations based on application of the revene recognition criteria and consideration ofpossible objectives of financial reporting.

#24-%.The note on estimations is inclded in the financial statement so that sta$eholders are aware thatnmbers arent e!act and there is ncertainty in the measrements in the financial statements. thelps sta$eholders by ensring their e!amination of the statements ta$es into accont the factthat vales for certain items are ncertain. nformation in the statements wold be more relevantand reliable if no estimates ha(to be made. f it was possible to $now each nmber for certainthen the information wold be mch more reliable. 8owever, with accral accontingncertainty in reported nmbers almost always e!ists on the financial statements date. The onlyway to avoid estimates wold be to delay acconting recognition ntil no ncertainty remained.This wold impair the seflness of financial statement information becase information woldbe provided to sta$eholders mch later.

2ome estimates that management wold ma$e with respect to revene and revene recognitionincldeB collection of amonts? when revene shold be recogni"ed? fair vales of service andphones? loyalty program redemptions? retrns and contract cancellations etc.



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#24-*.New cstomer activation and installation fees for cable are deferred and amorti"ed over theservice period. This treatment ma$es sense becase the installation and activation has no rewardsand benefits on its own. stomer &by' activation and installation to receive cable TP so the

payment is attached to the service for the cstomer receives. =s a reslt the revene is combinedwith the cable service over the service period. Gn the other hand his treatment of the revenedoesnt ma$e sense becase the revene recognition criteria have been met once the activationand installation is complete. 10 osts are $nown when the installation is complete? %0 Therevene associated with the installation is $nown? *0 ollection is reasonable assred since acredit chec$ is typically done for new cstomers? 40 n terms of performance ogers has flfilledthat part of the installation and the cstomer is enjoying the benefits of having cable. Therefore itwold be more relevant to recogni"e the revene one the installation is complete.

#24-4.ogers has mltiple revene streams. These are all described in Note %/d0 to the financial

statements and are reprodced belowB



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9oyalty programs are designed to promote cstomer retention for repeat bsiness. stomers payfor the &free' goods and services when they ma$e prchases that they do pay for. n other words,part of the revene from a sale is actally for the loyalty rewards the cstomer will receive in theftre. ogers attribtes a portion of the price of a good or service to the ftre loyalty rewardthe cstomer will receive. The jornal entry ogers wold record isB

Hr. ashEacconts receivable ZZZr. Heferred revene ZZZ

=cconting for loyalty rewards in challenging. ogers wold have to estimate the amont ofrevene to defer, which is related to the vale of the rewards the cstomer )illreceive /ogershas to estimate what cstomers will receive in rewards in the ftre0. ogers also has to estimatethe amont of loyalty points that will be redeemed. Not all loyalty points are redeemed so anestimate of the redemption rate is necessary.

#24-@

a. 2egmented financial information provides additional details the different lines of bsinessand geographical regions a company operates in. t separates balances into sorce ofincome, and other sb-categories. This information is helpfl to sers becase it helpsthem to better nderstand the companys operations and how they generate /or lose0money. #or e!ample, sers may e!amine segmented information and find that onebsiness nit is very profitable whereas another isnt or that one line of bsiness is$eeping several other strggling lines afloat. This information can help sers ma$e betterdecisions abot the company /whether or not to frther invest, lend money, ta$e thecompany in a new direction, etc.0. This is important for a company li$e ogers that is inmany lines of bsiness. 2egmented information provides insight into the differentcomponents of the bsiness.

b. ogers provides information for the following segmentsB :ireless, able and 3edia.



70/71

c.

=monts in millions of dollars %616 %611

evenes - :ireless


71/71

Hr. ash ZZZr. >nearned evene-%61@ 2eason tic$ets ZZZ

#24-D.

a. =dvertising revene is recorded in the period which the advertising airs. =t this pointogers has provided the promised service with cost and revene estimable and, itsassmed, that collection is reasonably assred.

b. =monts received from non-ogers cable and satellite providers are recogni"ed in themonth in which they are earned. This is a percentage completion sitation where a serviceis provided evenly over time. stomers receive access to channels over the month so itsreasonable to recogni"e the revene evenly over the period.

c. evene from the sale of hardware to retailers and sbscribers are recogni"ed when thee(ipment is delivered and accepted by the cstomer. =t the critical event of deliveryogers no longer has management responsibilities over the e(ipment? the cstomer hasthe ris$s and rewards of ownership? cost and revene are $nown for the e(ipment, and

either payment has been received /cash or credit card0 or the cstomers credit has beenchec$ed so collection is reasonably assred.

#24-16.ogers reported **,666,666 in nearned revene on its %611 balance sheet. This amontincldes advance tic$et sales, prepaid airtimes, and other prepaid advertising slots that ogershas not delivered yet delivered. ts considered a liability becase it represents an obligation fromogers to the cstomer to deliver on a good or service that the cstomer has already paid for. Theincrease in nearned revene represents a positive cash flow for ogers becase it means thecompany has received cash.

#24-11.ogers added 1,44D,666 postpaid cstomers in %611 bt lost 1,1A6,666 postpaid cstomers in thesame period? a net gain of %+ is the average revene earned by each sbscriber for the month. This is animportant statistics becase it tells investors and the company how mch a cstomer spends witha provider each month, which is sefl for predicting ftre revenes, net incomes, and cashflows. #rom %616 to %611 the =>+ has dropped from @%.

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