This exercise provides participants a forum in which to discuss gross versus net revenue recognition issues for financial statement presentation.
Part One: Identify and Resolve the Accounting Issues
1. Work in your table groups.
Review the facts in the following exercise, and identify and resolve the accounting questionspresented at the end of this guide, using the resources available to you in the classroom.
Use your professional judgment to determine the type, quantity, and quality of evidence necessary to support your recommendations and conclusions. Use the form provided to record the results of your research, including:
a. Issues identified during the review of the arrangements
b. Accountingalternatives, if applicable, and advice concerning Cabinet Producers USA’s (CPU) revenue recognition policy related to the income statement presentation
c. Search strategies (i.e., Technical Library queries) used and the research evidence gathered to support the accounting alternatives (and/or advice) you have chosen to resolve the issues and discuss with the entity (including relevant citationsand paragraphs and/or sections in accounting literature)
d. Final recommendations and conclusions related to CPU’s revenue recognition policy
You have 15 minutes to complete Part One. (Note that after about five minutes, you will be asked to briefly describe the issues that must be addressed and resolved in this case study.)
Part Two: Evaluate and Present Your Research ResultsRequirements
1. Select a spokesperson for the table group to present the results of the research process, using the information you recorded in the form presented below.
1. Each spokesperson will have two to three minutes to present the group’s recommendations and conclusions.
Assumptions and Facts
CPU specializes in selling custom-made kitchen cabinets. It has a physical location in a localshopping center, as well as a Web site and a magazine that identifies the types of cabinets for sale, and what is involved in the ordering process. CPU’s customers are typically homeowners who are either building a house or are involved in a home remodeling project. CPU does not actually build any of the kitchen cabinets itself, but rather contracts out the work to various suppliers that specializein custom cabinetry. However, all of a customer’s interaction during the ordering and manufacturing process is with CPU. CPU’s profit is based on the difference between the sales price negotiated with the customer and the price charged by the selected supplier.
Example of Services
CPU recently received a large order from John Smith (Mr. Smith) for a set of kitchen cabinets. Mr. Smith made atrip to CPU’s showcase store in order to discuss the details of the order. Mr. Smith communicated his requirements for the kitchen cabinets to CPU, and together they developed the specifications (i.e., height, length, color, and type of wood) for the cabinets. Additionally, they negotiated the price for the cabinets as $25,000 plus tax, and the approximate delivery time. Customer payments aretypically due five days prior to delivery; however, CPU extended 30-day payment terms to Mr. Smith after performing a credit evaluation. The following invoice was provided to Mr. Smith by CPU after CPU was able to contract with a supplier to manufacture the cabinets.
TO: | MR. JOHN SMITH |
FROM: | CABINET PRODUCERS USA |
SUBJECT: | SALES ORDER 5790 |
DATE: | April 17, 2008 || |
ITEMS: | KITCHEN CABINETS |
PRICE: | $25,000 | |
TAX: | $1,500 | |
TOTAL: | $26,500 | |
TERMS: | NET 30 DAYS AFTER DELIVERY |
Other Conditions: We are not responsible for any production defects. All returns/refunds due to defects in the product must be made to the manufacturer, Woodworks International (WI). We are solely responsible for returns/refunds...