1127 Case Study 2-1 According to FASB Accounting Standard Codification 605-50-45 Cash consideration given by a vendor to a customer is considered to be a reduction of the selling prices, therefore, shall be recorded as a reduction of revenue in the vendor’s income statement. It should be represented as a cost incurred to the extent that both of the following are met: * ”The vendor receives, or will receive, an identifiable benefit in exchange for the consideration. In order to meet this condition, the identified benefit must be sufficiently separable from the recipient’s purchase of the vendor’s products such that the vendor could have entered into an exchange transaction with a party other than a purchaser of its products or services in order to receive that benefit.” * “The vendor can reasonably estimate the fair value of the benefit identified under the preceding condition. If the amount of consideration paid by the vendor exceeds the estimated fair value of the benefit received, that excess amount shall be characterized as a reduction of revenue when recognized in the vendor’s income statement.” https://asc.fasb.org/section&trid=2197430 In Case study 2-1 Rainbow should recognize the sales incentive on the income statement as a reduction of sales because there is no sufficiently separable benefit to the entity. According to paragraph 605-50-25 certain sales incentives entitle a customer to receive a reduction in the price of a product or service of a specified amount of a prior purchase price charged to the customer at the point of sale.
The cost of capital is rate of return required by a capital provider in exchange foregoing an investment in another project, assets or business with similar risk. For that reason, it is also known as an opportunity cost. For investors, the rate return on a security is a benefit of investing. But for financial managers, the same rate of return is a cost of raising fund that is needed to operate the firm. In other words, the cost of raising fund is the firm’s cost of capital.
Thus, if we assume that price and AVC are constant, (1) can be rewritten as follows P.QBE = TFC + AVC.QBE which yields: (1) Q BE = TFC P − AVC (2) K The difference “P ! AVC” is often called the average contribution margin1 (ACM) because it represents the portion of selling price that "contributes" to paying the fixed costs. ! Formula (2) can be generalized to deal with the situation where the firm has determined in advance a target profit. The output quantity Q* that will yield this profit is implicitly given 1 The total contribution margin is simply (P !
IRR represents the discount rate at which the present value of the expected cash inflows from a project equals the present value of the expected cash outflows. Internal rate of return is used to evaluate the attractiveness of a project or investment. If the IRR of a new project exceeds a company’s required rate of return, that project is desirable. If IRR falls below the required rate of return, the project should be rejected. It is to be noted that NPV uses an absolute amount IRR is interpreted in terms of ‘Rate’.
The information “Bookings” convey is that: the company record sale of virtual goods as deferred revenue and then recognize the revenue over the estimated average life the purchased virtual goods or as the virtual goods are consumed. The way that Zynaga recognized revenue is based on the estimated life of virtual goods. This is not the same information available in the GAAP-based financial statements. Under GAAP, companies use accrual basis which they recognize revenue when they perform the service. 2) Do you think this is a useful measure?
Incremental cash flow is additional revenue that is generated when a business or other type of organization launches a new project. Cash flow of this type is considered to be outside the standard and usual sources of cash that the organization enjoys, and remains in that class or status until the project is fully integrated into the normal operations of the entity. One of the benefits of identifying incremental cash flow is that it makes the task of measuring the progress, or lack of it, associated with the new project. This in turn aids in evaluating the value of the project to the organization, making it easier to determine if the project should continue or be abandoned. In identifying the true contribution of the incremental cash flow, several factors must be considered.
2. What item costs and revenues are relevant to the decision of how many units of that item to stock? The item costs relevant to the decision of how many units of that item to stock are the liquidation costs if the item has not been demanded. The revenues related to this same decision are the contribution margins of that item if it has been demanded. The two are used in a way that balances these costs and revenues.
This method converts net income to net cash from operating activities. When using the indirect method a company must convert net income to net cash by gathering net income and adding or subtracting adjustments, this would give the company the Net cash, without having to go thru detail transactions. . Even though the indirect method may be easier for a company to manage their cash flow, I believe that this method may bring more work in case of an audit. (Weygandt, Kimmel, & Kieso, 2010. p 618).
Runway Discount should record the $25 referral credit when it recognizes the revenue created by the friend that was referred. Section 605-50-25-3 in the Codification states that in regards to sales incentives that will not result in a loss on the sale of a product, “the vendor shall recognize the cost of such a sales incentive at the later of the following: a. The date at which the related revenue is recognized by the vendor b. The date at which the sales incentive is offered” Due to the fact that choice a is the later of the two choices, Runway Discount should record the $25 referral credit when it recognizes the revenue created
These are expected returns, standard deviations, correlations of variation, and the capital asset pricing model (CAPM). Expected returns are important to determine if an investment will be beneficial to the investor. Standard deviation is a measure of risk. Correlation of variation is the ratio of risk over expected returns. CAPM is based on the idea that investors consider the time value of money and risk analysis.