115 CFA
File: Financial Analysis - Reading 21 - 2. Revenue Recognition

2. Revenue Recognition

b. describe general principles of revenue recognition and accrual accounting, specific revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, gross and net reporting of revenue), and implications of revenue recognition principles for financial analysis;

c. calculate revenue given information that might influence the choice of revenue recognition method;

What are the two revenue and expense recognition issues when accrual accounting is used to prepare financial statements?
1. Timing: when should revenue and expense be recognized?
2. Measurement: how much revenue and expense should be recognized?

What two conditions must be met for revenue recognition to take place?
1. Completion of the earnings process - The company must have provided all or virtually all the goods or services for which it is to be paid, and it must be possible to measure the total expected cost of providing the goods or services.
2. Assurance of payment - The quantification of cash or assets expected to be received for the goods or services provided must be reliable.

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