Income Measurement and Profitability Analysis 5 Copyright © 2007 by The McGraw-Hill Companies, doc

Income Measurement and Profitability Analysis Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved 5-2 Learning Objectives Discuss the general objective of the timing of revenue recognition, list the two general criteria that must be satisfied before revenue can be recognized, and explain why these criteria usually are satisfied at a specific point in time 5-3 Revenue Recognition Revenue should be recognized in the period or periods that the revenuegenerating activities of the company are performed 5-4 Realization Principle Record revenue when: The earnings process is complete or virtually complete AND There is reasonable certainty as to the collectibility of the asset to be received (usually cash) 5-5 SEC Staff Accounting Bulletin No 101 The SEC issued Staff Accounting Bulletin No 101 to crackdown on earnings management The bulletin provides additional guidance to determine if the realization principle is satisfied: Persuasive evidence of an arrangement exists Delivery has occurred or services have been performed The seller’s price to the buyer is fixed or determinable Collectibility is reasonably assured Completion of the Earnings Process Within a Single Reporting Period 5-6 Recognize Revenue When the product or service has been delivered to the customer and cash has been received or a receivable has been generated that has reasonable assurance of collectibility 5-7 Learning Objectives Describe the installment sales and cost recovery methods of recognizing revenues for certain installment sales and explain the unusual conditions under which these methods might be used 5-8 Significant Uncertainty of Collectibility When uncertainties about collectibility exist, revenue recognition is delayed Installment Sales Method Cost Recovery Method 5-9 Installment Sales Method The installment sales method recognizes the gross profit by applying the gross profit percentage on the sale to the amount of cash actually collected 5-10 Installment Sales Method Clarke, Inc had the following installment sales in addition to its regular sales 2005 $200,000 155,000 $45,000 22.50% Installment sales Cost of sales Gross profit Gross profit percentage 2006 $250,000 190,000 $60,000 24.00% 2007 $275,000 220,000 $55,000 20.00% $45,000 ÷ $200,000 = 22.50% 5-11 Installment Sales Method Clarke, Inc had the following installment sales in addition to its regular sales 2005 $200,000 155,000 $45,000 22.50% Installment sales Cost of sales Gross profit Gross profit percentage 2006 $250,000 190,000 $60,000 24.00% Cash Collections Installment sales Cash Collected: From 2005 Sales From 2006 Sales From 2007 Sales 2005 $ 200,000 (100,000) 2006 $ 250,000 (50,000) (195,000) 2007 $ 275,000 (50,000) (25,000) (200,000) 2007 $275,000 220,000 $55,000 20.00% At Dec 31, 2007, Clarke, Inc is still owed $30,000 from the 2006 sales and $75,000 from the 2007 sales 5-12 Installment Sales Method General Journal Description Debit Installment sales receivable 2005 Inventory Deferred gross profit 2005 Credit 200,000 155,000 45,000 Deferred gross profit is the difference between the selling price and the cost of the inventory 5-13 Installment Sales Method During 2005, Clarke collected $100,000 on its installment sales General Journal Description Debit Installment sale s receivable 2005 Credit 200,000 Inventory 155,000 Deferred gross profit 2005 45,000 Cash 100,000 Installment sale s receivable 2005 100,000 Deferred gross profit 2005 22,500 Realized gross profit 22,500 ($100,000 collected x 22.50%) This entry records the Realized Gross Profit by adjusting the Deferred Gross Profit account 5-14 Installment Sales Method During 2006, Clarke sold $250,000 on installments and collected $50,000 on its 2005 installment sales and $195,000 on its 2006 installment sales General Journal Description Debit Installment sales receivable 2006 Credit 250,000 Inventory 190,000 Deferred gross profit 2006 60,000 Cash 245,000 Installment sales receivable 2005 50,000 Installment sales receivable 2006 195,000 Deferred gross profit 2005 11,250 Deferred gross profit 2006 46,800 Realized gross profit 58,050 Cash collections - 2005 $ 50,000 Cash collections - 2006 195,000 × × 22.50% = $ 11,250 24.00% = 46,800 $ 58,050 5-15 Installment Sales Method General Journal Description Debit Installment sales receiva ble 2007 Credit 275,000 Inventory 220,000 Deferred gross profit 2007 55,000 Cash 275,000 Installment sa les receivable 2005 50,000 Installment sa les receivable 2006 25,000 Installment sa les receivable 2007 200,000 Deferred gross profit 2005 11,250 Deferred gross profit 2006 6,000 Deferred gross profit 2007 40,000 Realized gross profit 57,250 Cash Colle ction on Installme nt Sa les in 2007 2005 2006 2007 $ 50,000 25,000 200,000 $ 275,000 × × × 22.50% 24.00% 20.00% = = = $ $ 11,250 6,000 40,000 57,250 5-16 Installment Sales Method De ferred Gross Profit 2005 2005 22,500 45,000 2005 2006 11,250 2007 11,250 De ferred Gross Profit 2006 2006 46,800 60,000 2006 2007 6,000 7,200 Deferred Gross Profit 2007 2007 40,000 55,000 2007 15,000 5-17 Installment Sales Method Balance Sheet Installment accounts receivable $ 105,000 Less: Deferred gross profit (22,200) Net Installment accounts receivable $ 82,800 Installment sales receivable 2006 Installment sales receivable 2007 Installment accounts receivable $ 30,000 75,000 $ 105,000 Deferred gross profit 2006 Deferred gross profit 2007 Deferred gross profit $ 7,200 15,000 $ 22,200 5-18 Cost Recovery Method Clarke, Inc had the following installment sales in addition to its regular sales The company uses the cost recovery method to account for installment sales Installment sales Cost of sales Gross profit Gross profit percentage 2005 $200,000 155,000 $45,000 22.50% 2006 $250,000 190,000 $60,000 24.00% 2007 $275,000 220,000 $55,000 20.00% $45,000 ÷ $200,000 = 22.50% 5-19 Cost Recovery Method The following schedule shows the pattern of cash collections for the three year period Year of Collection 2006 2007 Year of Sale 2005 2005 2006 2007 COGS $100,000 $50,000 195,000 $ 155,000 $ 190,000 $50,000 25,000 200,000 $ 220,000 Under the cost recovery method profit is not recognized until the seller has recovered all of the cost of the goods sold 5-20 Cost Recovery Method General Journal Description Debit Installment receivable 2005 Credit 200,000 Inventory 155,000 Deferred gross profit 2005 45,000 Cash 100,000 Installment receivable 2005 100,000 The entries are exactly the same as under the Installment Method—EXCEPT that there is not an entry to realize gross profit Since we have not collected cash in excess of COGS, no gross profit is recognized in 2005 5-21 Cost Recovery Method In 2006, let’s concentrate on the entries relating to 2005 sales only General Journal Description Debit Cash Credit 50,000 Installment receivable 2005 50,000 Now can we recognize some profit? 2005 Installment Sale Cost of goods sold $ 155,000 Cash collections - 2005 (100,000) Cash collections - 2006 (50,000) Unrecovered cost 5,000 We have not fully recovered the cost, so no profit is recognized in 2006 5-22 Cost Recovery Method Here are the entries we would make in 2007 relating to 2005 sales General Journal Description Debit Cash Credit 50,000 Installment receivable 2005 Deferred gross profit 50,000 45,000 Realized gross profit 45,000 We have fully recovered the $155,000 cost during 2007, so the entire deferred gross profit will be recognized 5-23 Learning Objectives Discuss the implications for revenue recognition of allowing customers the right of return 5-24 Right of Return In most situations, even though the right to return merchandise exists, revenues and expenses can be appropriately recognized at point of delivery Estimate the returns Reduce both Sales and Cost of Goods Sold 5-25 Learning Objectives Identify situations that call for the recognition of revenue over time and distinguish between the percentage-of-completion and completed contract methods of recognizing revenue for long-term contracts Completion of the Earnings Process Over Multiple Reporting Periods 5-26 Completed Contract Method Long-term Contracts Percentage-ofCompletion Method 5-27 Completed Contract Method Recognizes revenue at a point in time when the earnings process is complete 5-28 Completed Contract Method Geller Construction entered into a three-year contract to build a containment vessel for Southeast Power Company for a contract price of $1,400,000 Presented below is information about the contract 2006 250,000 250,000 1,000,000 $ 1,250,000 2007 $ 550,000 250,000 800,000 425,000 $ 1,225,000 2008 $ 400,000 800,000 1,200,000 $ 1,200,000 $ Construction costs incurred during they year Construction costs incurred in prior years Cumula tive construction costs Estimated costs to complete a t e nd of year Total estimated and actual construction costs $ 525,000 470,000 $ 625,000 405,000 $ Billings made during the year Cash collections during year 250,000 225,000 Let’s see how Geller will account for the revenues and cost of this project using the completed contract method 5-29 Completed Contract Method General Journal Description Debit Construction in progress Credit 250,000 Cash, materials, etc Accounts receivable 250,000 250,000 Billings on construction contract Cash 250,000 225,000 Accounts receivable 225,000 Construction costs incurred during they year Construction costs incurred in prior yea rs Cumulative construction costs Estimated costs to complete at e nd of yea r Tota l estimated and a ctua l construction costs 2006 $ 250,000 250,000 1,000,000 $ 1,250,000 Billings made during the year Cash collections during year Gross profit is not recognized until project is complete $ 250,000 225,000 5-30 Completed Contract Method General Journal Description Debit Construction in progress Credit 250,000 Cash, materials, etc Accounts receivable Billings on construction contract Construction in Progress - Billings on Construction Contract Debit Balance (Unbilled Receivable) Classified as an asset 250,000 250,000 250,000 Construction in Progress - Billings on Construction Contract Credit Balance (Overbilled Receivable) Classified as a liability 10 5-31 Completed Contract Method General Journal Description Debit Construction in progress Gross profit is not recognized until project is complete Credit 550,000 Cash, materials, etc 550,000 Accounts receivable 525,000 Billings on construction contract 525,000 Cash 470,000 Accounts receivable 470,000 Construction costs incurred during they yea r Construction costs incurred in prior years Cumulative construction costs Estimated costs to complete at end of year Tota l estima te d a nd actual construction costs 2006 $ 250,000 250,000 1,000,000 $ 1,250,000 2007 $ 550,000 250,000 800,000 425,000 $ 1,225,000 Billings made during the year Cash collections during ye ar $ 250,000 225,000 $ 525,000 470,000 5-32 Completed Contract Method General Journal Description Debit Construction in progress Credit 400,000 Cash, materials, etc 400,000 Accounts receiva ble 625,000 Billings on construction contract 625,000 Cash 405,000 Accounts receiva ble 405,000 Construction costs incurre d during they year Construction costs incurre d in prior years Cumula tive construction costs Estimated costs to complete a t e nd of year Total estimated and actual construction costs 2006 $ 250,000 250,000 1,000,000 $ 1,250,000 2007 550,000 250,000 800,000 425,000 $ 1,225,000 2008 400,000 800,000 1,200,000 $ 1,200,000 Billings made during the year Cash collections during year $ 250,000 225,000 $ $ $ 525,000 470,000 $ 625,000 405,000 5-33 Completed Contract Method General Journal Description Debit Construction in progress Cash, materia ls, etc Construction costs incurred during they year Construction costs incurred in prior years Accounts receivable Cumulative construction costs Estimated costs to complete at end of year Billings on construction contract Total estimated and actual construction costs Cash Billings ma de during the year Cash collections re ceivable Accounts during year Cost of construction Construction in progress Credit 400,000 2006 2007 250,000 $ 550,000 250,000 625,000 800,000 250,000 1,000,000 425,000 $ 1,250,000 $ 1,225,000 $ $ 405,000 250,000 225,000 $ Cost of construction Retained earnings 800,000 1,200,000 $ 1,200,000 625,000 $ 625,000 405,000 405,000 1,200,000 200,000 Revenue from long-term contract Revenue from long-term contract 525,000 470,000 2008 400,000 $ 400,000 Gross profit is recognized in year since project is complete 1,400,000 1,400,000 Remember that the contract price was $1,400,000 1,200,000 200,000 11 5-34 Completed Contract Method Construction in Progress 2006 250,000 2007 550,000 2008 400,000 2008 200,000 1,400,000 Billings on Construction Contract 250,000 2006 525,000 2007 625,000 2008 1,400,000 Entry to transfer title to the customer General Journal Description Debit Billings on construction contract 1,400,000 Construction in progress Credit 1,400,000 5-35 Percentage-of-Completion Method Measuring Progress Toward Completion Cost incurred to date Estimate of project’s total cost Gross profit estimate 5-36 Percentage-of-Completion Method Total costs incurred to date Percent complete = Most recent estimate of total project cost Let’s look at an example 12 5-37 Percentage-of-Completion Method Geller Construction entered into a three-year contract to build a containment vessel for Southeast Power Company for a contract price of $1,400,000 Presented below is information about the contract Billings made during the year Cash collections during year 2006 250,000 250,000 1,000,000 $ 1,250,000 2007 $ 550,000 250,000 800,000 425,000 $ 1,225,000 2008 $ 400,000 800,000 1,200,000 $ 1,200,000 $ Construction costs incurred during they year Construction costs incurred in prior years Cumula tive construction costs Estimated costs to complete a t e nd of year Total estimated and actual construction costs $ 525,000 470,000 $ 625,000 405,000 $ 250,000 225,000 Let’s see how Geller will account for the revenues and cost of this project using the percentage-of-completion method 5-38 Percentage-of-Completion Method Contract price Actual costs to date Estimated costs to complete Total project cost Total gross profit (Contract price - total costs) Percentage-of-completion (actual costs to date) Divided by the estimated total project cost Equals percentage complete to date 2006 1,400,000 $250,000 1,000,000 $1,250,000 150,000 $ $ $ $ 250,000 1,250,000 20.00% Total project gross profit $ Multiplied by the estimated % of completion Gross profit earned to date $ Less gross profit recognized in previous periods Gross profit recognized currently $ 150,000 20.00% 30,000 30,000 5-39 Percentage-of-Completion Method General Journal Description Debit Construction in progress Credit 250,000 Cash, materials, etc 250,000 Accounts receivable 250,000 Billings on construction contract Cash 250,000 225,000 Accounts receivable Entries are identical to the entries for the completed contract method Contra account to CIP 225,000 Construction costs i ncurred during they ye ar Construction costs i ncurred in prior years Cumulative construction costs Estimated costs to comple te at end of yea r Total estimated and actual construction costs Billings m ade during the ye ar Ca sh colle ctions during yea r 2006 250,000 250,000 1,000,000 $ 1,250,000 $ $ 250,000 225,000 13 5-40 Percentage-of-Completion Method General Journal Description Debit Construction in progress Credit 250,000 Cash, materials, etc 250,000 Accounts receivable 250,000 Billings on construction contract Construction in Progress Cash - Billings on Construction Contract Accounts receivable Debit Balance (Unbilled Receivable) 250,000 Construction in Progress 225,000 - Billings on Construction Contract 225,000 Credit Balance (Overbilled Receivable) Classified as an asset Classified as a liability 5-41 Percentage-of-Completion Method Contract price Actual costs to date Estimated costs to complete Total project cost Total gross profit (Contract price - total costs) General Journal Description Debit Construction in progress Credit 250,000 Percentage-of-completion (actual costs to date) Cash, materials,by the estimated total project cost Divided etc Equals percentage complete to date Accounts receivable gross profit Total project 2006 $ 1,400,000 $250,000 1,000,000 $1,250,000 $ 150,000 $ 250,000 $ 1,250,000 20.00% Multipl ied by the estimated % of Billings on construction contract completion Cash 20.00% Gross profit earned to date $ 30,000 Less gross profit recognized in previous periods 225,000 30,000 Gross profit recognized currently $ Accounts receivable Cost of construction Construction in progress 250,000 250,000 150,000 $ 250,000 225,000 250,000 30,000 Revenue from long-term contract 280,000 5-42 Percentage-of-Completion Method General Journal Description Debit Construction in progress Cash, materials, etc Accounts receivable 250,000 250,000 Billings on construction contract Cash 250,000 225,000 Closing Entry receivable Accounts Cost of construction Construction in progress 225,000 250,000 30,000 Revenue from long-term contract Revenue from long-term contract Credit 250,000 280,000 280,000 Cost of construction 250,000 Retained earnings 30,000 14 5-43 Percentage-of-Completion Method Contract price Actual costs to date Estimated costs to complete Total project cost Total gross profit (Contract price - total costs) 2006 $ 1,400,000 $250,000 1,000,000 $1,250,000 $ 150,000 Percentage-of-completion (actual costs to date) Divided by the estimated total project cost Equals percentage complete to date $ 250,000 $ 800,000 $ 1,250,000 $ 1,225,000 20.00% 65.31% Total project gross profit $ Multiplied by the estimated % of completion Gross profit earned to date $ Less gross profit recognized in previous periods Gross profit recognized currently $ 2007 $ 1,400,000 $800,000 425,000 $1,225,000 $ 175,000 150,000 $ 20.00% 30,000 $ 30,000 $ 175,000 65.31% 114,286 (30,000) 84,286 5-44 Percentage-of-Completion Method General Journal Description Debit Construction in progress Credit 550,000 Cash, materia ls, etc 550,000 Accounts receivable 525,000 Billings on construction contract 525,000 Cash 470,000 Accounts receivable Construction costs incurred during they year Construction costs incurred in prior years Cumula tive construction costs Estimated costs to complete a t e nd of year Total estimated and actual construction costs Billings made during the year Cash colle ctions during year 470,000 2006 $ 250,000 250,000 1,000,000 $ 1,250,000 2007 $ 550,000 250,000 800,000 425,000 $ 1,225,000 $ $ 250,000 225,000 525,000 470,000 5-45 Percentage-of-Completion Method 2006 General Journal1,400,000 $ $250,000 Description Debit 1,000,000 Contract price Actua l costs to date Estimated costs to complete Total project cost Construction in progress Total gross profit (Contract price - total costs) 2007 $ 1,400,000 $800,000 425,000 $1,250,000 550,000$1,225,000 $ 150,000 $ 175,000 Credit Cash, materials, etc Percenta ge-of-comple tion (actual costs to date ) Divided by the estimated total project cost Accounts receivable Equals percentage complete to da te Billings on construction contract 550,000 $ 250,000 $ 800,000 $ 1,250,000 $ 1,225,000 525,000 20.00% 65.31% Cash Total project gross profit $ Multiplied by the estimated % of completion Gross profit ea rne d to date $ Less gross profit recognized in previous periods Accounts receivable currently Gross profit recognized $ 150,000 $ 20.00% 470,000 30,000 $ 30,000 $ Cost of construction 525,000 550,000 Construction in progress 470,000 84,286 Revenue from long-term contract Revenue from long-term contract 175,000 65.31% 114,286 (30,000) 84,286 634,286 634,286 Cost of construction 550,000 Retained earnings 84,286 15 5-46 Percentage-of-Completion Method Contract price Actual costs to date Estimated costs to complete Total project cost Total gross profit (Contract price - total costs) 2006 $ 1,400,000 $250,000 1,000,000 $1,250,000 $ 150,000 Percentage-of-completion (actual costs to date) Divided by the estimated total project cost Equals percentage complete to date $ 250,000 $ 800,000 $ 1,250,000 $ 1,225,000 20.00% 65.31% Total project gross profit $ Multiplied by the estimated % of completion Gross profit earned to date $ Less gross profit recognized in previous periods Gross profit recognized currently $ 2007 $ 1,400,000 $800,000 425,000 $1,225,000 $ 175,000 150,000 $ 20.00% 30,000 $ 30,000 $ 2008 $ 1,400,000 $1,200,000 $1,200,000 $ 200,000 (project is complete) 175,000 $ 65.31% 114,286 (30,000) 84,286 $ 100.00% 200,000 100.00% 200,000 (114,286) 85,714 5-47 Percentage-of-Completion Method General Journal Description Debit Construction in progress Credit 400,000 Cash, materials, etc 400,000 Accounts receivable 625,000 Billings on construction contra ct 625,000 Cash 405,000 Accounts receiva ble 405,000 2006 400,000 $ 250,000 85,660 250,000 1,000,000 485,660 $ 1,250,000 Estimated costs to complete a t e nd of year Revenue from long-term contract Total estimated and actual construction costs Cost of construction Billings made during the year Retained e arnings Cash collections during year 2007 2008 $ 550,000 $ 400,000 250,000 800,000 485,660 1,200,000 800,000 425,000 $ 1,225,000 $ 1,200,000 $ Cost of construction Construction costs incurred during they year Construction in progress Construction costs incurred in prior years Revenue from long-term contract Cumula tive construction costs 400,000 $ 525,000 85,660 $ 625,000 470,000 405,000 250,000 225,000 5-48 Percentage-of-Completion Method 2006 2007 2008 $ 1,400,000 General Journal $ 1,400,000 $ 1,400,000 $250,000 $800,000 $1,200,000 Description Debit 425,000 Credit 1,000,000 Contract price Actua l costs to date Estim ate d costs to comple te Total proje ct cost Construction in progress - total costs) Total gross profit (Contract price $ $1,250,000 $1,225,000 400,000 150,000 $ 175,000 $ Cash, materials, etc Percentage-of-completion (actual costs to date ) Divided by receivable Accounts the estimate d total proje ct cost Equals percentage complete to date Billings on construction contra ct $ 250,000 $ 800,000 $ 1,250,000 $ 1,225,000 625,000 20.00% 65.31% Total proje ct gross profit $ Multiplied by the estimated % of completion Cash profit earned to date Gross $ Le ss gross profit recogniz ed in previous periods Accounts receiva ble Gross profit recognized currently $ Cost of construction Construction in progress 150,000 $ 175,000 $ 20.00% 65.31% 405,000 30,000 $ 114,286 (30,000) 30,000 $ 84,286 $ 100.00% 625,000 200,000 100.00% 200,000 (114,286) 405,000 85,714 400,000 85,714 Revenue from long-term contract Revenue from long-term contract $1,200,000 200,000 400,000 (project is comple te) 485,714 485,714 Cost of construction 400,000 Retained e arnings 85,714 16 5-49 Percentage-of-Completion Method Construction in Progress 2006 250,000 30,000 2007 550,000 84,286 2008 400,000 85,714 1,400,000 Billings on Construction Contract 250,000 2006 525,000 2007 625,000 2008 1,400,000 Entry to transfer title to the customer General Journal Description Debit Billings on construction contract 1,400,000 Construction in progress Credit 1,400,000 5-50 Long-term Contract Losses Periodic Loss for Profitable Projects Determine periodic loss and record loss as a credit to the Construction in Progress account Loss Projected for Entire Project Estimated loss is fully recognized in the first period the loss is anticipated and is recorded by a credit to Construction in Progress account 5-51 Learning Objectives Discuss the revenue recognition issues involving software and franchise sales 17 5-52 Software Revenue Recognition Statement of Position 97-2 If a sale includes multiple elements (software, future upgrades, postcontract customer support, etc.), the revenue should be allocated to the various elements based on the relative fair value of the individual elements This will likely result in a portion of the proceeds received from the sale of software being deferred and recognized as revenue in future periods 5-53 Franchise Sales Initial Franchise Fees Continuing Franchise Fees Generally are recognized at a point in time when the earnings process is virtually complete Recognized over time as the services are performed Source: SFAS 45 5-54 Learning Objectives Identify and calculate the common ratios used to assess profitability 18 5-55 Receivables Turnover Ratio Receivables Turnover = Ratio Net Sales Average Accounts Receivable Whenever a ratio divides an income statement balance by a balance sheet balance, the average for the year is used in the denominator This ratio measures how many times a company converts its receivables into cash each year 5-56 Average Collection Period Average Collection Period = 365 Receivables Turnover Ratio This ratio is an approximation of the number of days the average accounts receivable balance is outstanding 5-57 Inventory Turnover Ratio Inventory Turnover Ratio = Cost of Goods Sold Average Inventory This ratio measures the number of times merchandise inventory is sold and replaced during the year 19 5-58 Average Days in Inventory Average 365 Days in = Inventory Turnover Ratio Inventory This ratio indicates the number of days it normally takes to sell inventory 5-59 Asset Turnover Ratio Asset Turnover Ratio = Net Sales Average Total Assets This ratio measures how efficiently a company utilizes all of its assets to generate revenue 5-60 Profit Margin on Sales Profit Margin = on Sales Net Income Net Sales This ratio indicates the portion of each dollar of revenue that is available to cover expenses 20 5-61 Return on Total Assets Return on = Total Assets Net Income Average Total Assets This ratio measures how well assets have been employed 5-62 Return on Equity Return on Equity = Net Income Average Shareholders’ Equity This ratio measures the ability of management to generate net income from the resources the owners provide 5-63 Interim Reporting Appendix 21 5-64 Interim Reporting Issued for periods of less than a year, typically as quarterly financial statements Serves to enhance the timeliness of financial information Fundamental debate centers on the choice between the discrete and integral part approaches 5-65 Interim Reporting Reporting Revenues and Expenses With only a few exceptions, the same accounting principles applicable to annual reporting are used for interim reporting Reporting Unusual Items Discontinued operations and extraordinary items are reported entirely within the interim period in which they occur Earnings Per Share Quarterly EPS calculations follow the same procedures as annual calculations Reporting Accounting Changes Accounting changes made in an interim period are reported by retrospectively applying the changes to prior financial statements 5-66 Minimum Disclosures Sales, income taxes, and net income Discontinued operations, extraordinary items, and unusual or infrequent items Earnings per share Contingencies Seasonal revenues, costs, and expenses Changes in accounting principles or estimates Significant changes in estimates for income taxes Significant changes in financial position 22 5-67 End of Chapter 23 ... $ 250 ,000 250 ,000 1,000,000 $ 1, 250 ,000 2007 $ 55 0,000 250 ,000 800,000 4 25, 000 $ 1,2 25, 000 Billings made during the year Cash collections during ye ar $ 250 ,000 2 25, 000 $ 52 5,000 470,000 5- 32... 200,000 $ 2 75, 000 × × × 22 .50 % 24.00% 20.00% = = = $ $ 11, 250 6,000 40,000 57 , 250 5- 16 Installment Sales Method De ferred Gross Profit 20 05 20 05 22 ,50 0 45, 000 20 05 2006 11, 250 2007 11, 250 De ferred... percentage 20 05 $200,000 155 ,000 $ 45, 000 22 .50 % 2006 $ 250 ,000 190,000 $60,000 24.00% 2007 $2 75, 000 220,000 $55 ,000 20.00% $ 45, 000 ÷ $200,000 = 22 .50 % 5- 19 Cost Recovery Method The following schedule