the heirs probably have a substantial say in who is on the Board. Thus the needs of the heirs must be given consideration in developing accounting policies. 3. Performance evaluation: Similarly, the heirs’ analyst will be evaluating the performance of the management in order to advise the heirs on how to vote their shares. 4. Income tax deferral: The company probably will be permitted to deduct expenses when incurred and include revenues when received for income tax purposes, in view of the nature of the operations. If tax is affected by the revenue recognition policies, then the tax deferral objective is relevant, but probably be a secondary objective. Since is somewhat flexible in the area of revenue and expense recognition, it is critical that the primary user and objective be identified at this point in time. Otherwise it will be difficult to provide a recommendation for the client. Revenue/expense recognition alternatives Some students may try to fit the recognition of revenue into the molds of recognition at (1) the point of production, (2) point of sale, or (3) point of cash receipt. This case does not fit into those molds, however, since all three events are occurring simultaneously (at different rates) through time. Some students may also concentrate exclusively on revenue recognition and overlook the related issues of expense recognition. Better students will apply more basic criteria of revenue recognition, such as: the critical event theory, completion of the earnings cycle, or measurability (or relative certainty) of future cash flows for revenues and costs, and will realize that unless one simply lets the cash inflows and outflows fall where they may, costs must be deferred and/or revenues accrued in advance of receipt in order to achieve matching and satisfy the objectives of stewardship, cash flow prediction, and performance evaluation. There are at least three conceivable alternatives to revenue and expense recognition in this case: Recognize revenue as the books are delivered. This will require deferral of most of the revenue received from the advance sales, and also will require deferral and amortization of the initial promotional expense (the largest cost component). The stumbling block would be deferred of promotion expense, which requires measurable future benefit to be justified under , especially since the promotional materials are “internally generated” intangibles. Recognize revenue as the cash is received, and then recognize deferred initial costs on a cost-recovery basis until all deferred costs have been recovered. Thereafter,
the heirs probably have a substantial say in who is on the Board. Thus the needs of the heirs must be given consideration in developing accounting policies. 3. Performance evaluation: Similarly, the heirs’ analyst will be evaluating the performance of the management in order to advise the heirs on how to vote their shares. 4. Income tax deferral: The company probably will be permitted to deduct expenses when incurred and include revenues when received for income tax purposes, in view of the nature of the operations. If tax is affected by the revenue recognition policies, then the tax deferral objective is relevant, but probably be a secondary objective. Since is somewhat flexible in the area of revenue and expense recognition, it is critical that the primary user and objective be identified at this point in time. Otherwise it will be difficult to provide a recommendation for the client. Revenue/expense recognition alternatives Some students may try to fit the recognition of revenue into the molds of recognition at (1) the point of production, (2) point of sale, or (3) point of cash receipt. This case does not fit into those molds, however, since all three events are occurring simultaneously (at different rates) through time. Some students may also concentrate exclusively on revenue recognition and overlook the related issues of expense recognition. Better students will apply more basic criteria of revenue recognition, such as: the critical event theory, completion of the earnings cycle, or measurability (or relative certainty) of future cash flows for revenues and costs, and will realize that unless one simply lets the cash inflows and outflows fall where they may, costs must be deferred and/or revenues accrued in advance of receipt in order to achieve matching and satisfy the objectives of stewardship, cash flow prediction, and performance evaluation. There are at least three conceivable alternatives to revenue and expense recognition in this case: Recognize revenue as the books are delivered. This will require deferral of most of the revenue received from the advance sales, and also will require deferral and amortization of the initial promotional expense (the largest cost component). The stumbling block would be deferred of promotion expense, which requires measurable future benefit to be justified under , especially since the promotional materials are “internally generated” intangibles. Recognize revenue as the cash is received, and then recognize deferred initial costs on a cost-recovery basis until all deferred costs have been recovered. Thereafter,
FA2_Ch6_text_solutions.docx