...Joan Holtz 1. Electric Utility Bills Revenue of the Electric Company can be measured given the amount of electricity generated for the year multiplied by the per-kilowatt/hour charge to customers. This is because the electric service has already been provided and distributed to customers for ready consumption 2. Retainer Fee The amount of revenue to be counted in 2010 is $5,000 from the $10,000 retainer fee good for 1 year. This is because, despite the fact that there was no way of knowing how often, or when, the client would request advice, the fee is paying for the certainty of the law firm’s availability and expertise at any point where these are needed by the client. The delivery of this “service” lapses each month in proportion to the total amount of paid fees hence $5,000 should be recognized by the end of 2010. 3. Cruise The amount of revenues that Raymond’s Travel Agency should record in 2010 is $260,000. The service that the travel agency provides is in the act of booking related travel services – accommodations, transportation, coordination in behalf of clients, etc – as opposed to delivering these same services per se. Since Raymond’s completed the above while still within 2010, revenues should already be recognized. 2011 refunds would not have an impact on revenue recognition as this should already represent a loss to Raymond’s, though certain stipulations in the company’s reservation policy should eliminate such possibilities or aid in...
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...CASE 5-3 JOAN HOLTZ (A)* (1) Electric utility bills. An electric utility company can estimate with reasonable certainty the expected revenue in a given period by taking into consideration some of the following: customer habits, average historical trends, demand and supply forecasts, and environmental changes. The electric utility industry effectively uses an insurance industry concept—the law of large numbers, to determine with certainty, expected revenue. The law of large numbers states, as the number of participants (customers) in a risk class (low, medium, high kilowatt users) increases, the expected outcome (usage for specific class) remains the same but the standard deviation (variability of usage) continues to drop until the probability that the average outcome (average usage) will be different from the expected outcome (expected usage) becomes negligible. This concept is conceptually similar to the Central Limit Theorem, and thus illustrates on average, the more observations per class, the more the usage tends to be bell-shaped and this usage is used for basing revenues per class. This is one way how the utility company can determine period-end revenue. Another way is if customer usage is consistent from period to period it can base reported revenue on actual meter readings. The unreported usage in December would be reported in January, and overall revenues for this year would not be materially misstated. The utility company can also adjust for seasonal changes in demand...
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...CASE 5-3 JOAN HOLTZ (A)* (1) Electric utility bills. An electric utility company can estimate with reasonable certainty the expected revenue in a given period by taking into consideration some of the following: customer habits, average historical trends, demand and supply forecasts, and environmental changes. The electric utility industry effectively uses an insurance industry concept—the law of large numbers, to determine with certainty, expected revenue. The law of large numbers states, as the number of participants (customers) in a risk class (low, medium, high kilowatt users) increases, the expected outcome (usage for specific class) remains the same but the standard deviation (variability of usage) continues to drop until the probability that the average outcome (average usage) will be different from the expected outcome (expected usage) becomes negligible. This concept is conceptually similar to the Central Limit Theorem, and thus illustrates on average, the more observations per class, the more the usage tends to be bell-shaped and this usage is used for basing revenues per class. This is one way how the utility company can determine period-end revenue. Another way is if customer usage is consistent from period to period it can base reported revenue on actual meter readings. The unreported usage in December would be reported in January, and overall revenues for this year would not be materially misstated. The utility company can also adjust for seasonal changes in demand...
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...involved in estimating bad debts, writing off specific accounts, and booking bad debts recovered, is complicated and not easy to follow. If experience is any guide, it is quite likely that at the time this chapter is taught the press will be describing a company that has gotten into trouble for overstating its revenue or understating its bad debt or warranty allowance. Discussion of such a situation would be interesting. Cases Stern Corporation (A) is a straightforward problem in handling accounts receivable and bad debts. MacDonald’s Farm, by contrast, has few technical calculations but provides an excellent opportunity for a realistic discussion of alternative ways of measuring revenue and of valuing assets. Joan Holtz (A) is a different type of case. It is a device for raising several discrete, separable problems about the subject matter of the chapter, from which the instructor can pick and choose those he or she wishes to take up in class. (It probably is not feasible to discuss all of them.) Bausch & Lomb, Inc., is an actual case situation involving revenue recognition. Boston Automation Systems, Inc. involves a review of the company’s revenue recognition practices in the light...
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...involved in estimating bad debts, writing off specific accounts, and booking bad debts recovered, is complicated and not easy to follow. If experience is any guide, it is quite likely that at the time this chapter is taught the press will be describing a company that has gotten into trouble for overstating its revenue or understating its bad debt or warranty allowance. Discussion of such a situation would be interesting. Cases Stern Corporation (A) is a straightforward problem in handling accounts receivable and bad debts. MacDonald’s Farm, by contrast, has few technical calculations but provides an excellent opportunity for a realistic discussion of alternative ways of measuring revenue and of valuing assets. Joan Holtz (A) is a different type of case. It is a device for raising several discrete, separable problems about the subject matter of the chapter, from which the instructor can pick and choose those he or she wishes to take up in class. (It probably is not feasible to discuss all of them.) Bausch & Lomb, Inc., is an actual case situation involving revenue recognition. Boston Automation Systems, Inc. involves a review of the company’s revenue recognition practices in the light...
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...Qklhokn 1 Accounting Theory Paper-8 M. Com. (Final) Directorate of Distance Education Maharshi Dayanand University ROHTAK – 124 001 2 jktuhfr foKku Copyright © 2004, Maharshi Dayanand University, ROHTAK All Rights Reserved. No part of this publication may be reproduced or stored in a retrieval system or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise, without the written permission of the copyright holder. Maharshi Dayanand University ROHTAK – 124 001 Developed & Produced by EXCEL BOOKS PVT. LTD., A-45 Naraina, Phase 1, New Delhi-110028 Qklhokn 3 Contents Chapter 1 Accounting-An Intoduction Chapter 2 The History and Evolution of Accounting Thoughts 23 Chapter 3 Approaches to Accounting Theory 56 Chapter 4 Accounting Postulates, Concepts and Principles 88 Chapter 5 Income Concepts 107 Chapter 6 Revenues, Expenses, Gains and Losses 139 Chapter 7 Valuation of Assets 158 Chapter 8 Liabilities and Equity 177 Chapter 9 Depreciation Accounting and Policy 192 Chapter 10 Inventories and their Valuation 238 Chapter 11 Financial Reporting 277 Chapter 12 Specific Issues in Corporate Reporting 302 Chapter 13 Harmonization of Financial Reporting 323 Chapter 14 Accounting for Price Level Changes 339 Chapter 15 Human Resource Accounting 397 Chapter 16 Financial Engineering:...
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