Английский язык = English. Учебное пособие-1

8.Revenue should be recognized when the most critical event in ... has been completed.

9.The information must be reliable – ... and ... – in order to be useful.

10.Revenue from credit sales should be recorded ... of any trade and sales discounts.

Exercise 6. Insert the prepositions where necessary.

1.Service companies also engage … “sales” transactions.

2.These transactions may require … the performance … a single, short-term act or several acts that extend … several accounting periods.

3.In some industries customers are allowed to return goods … certain circumstances.

4.Goods may be returned … a refund.

5.The earning process may be virtually complete … the date of sale.

Exercise 7. Answer the questions.

1.How is accrual accounting related to the measurement of cash flows?

2.How do they distinguish among earning revenue, revenue recognition, and realization?

3.Realization has nothing to do with the income concept, does it?

4.What two criteria must be met to recognize revenue?

5.Methods of revenue recognition are also methods of recognizing income, aren’t they?

6.In what way do the revenue recognition criteria incorporate different characteristics of information reported?

Exercise 8. Describe different points of revenue concept.

Exercise 9. Describe the realisation principle and its criteria.

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II. Read Text B and translate it with an economic dictionary.

TEXT B

Cash-Collection Methods

The most common revenue recognition point is the point of sale, because the two revenue recognition criteria usually are satisfied at that point.

But some companies engage in earnings activities in which production of the goods to be sold extends over several accounting periods. For example, bridges, airplanes, office buildings and oil refineries all require several years to complete. Also, a service transaction may extend over several years. In order to provide timely information about earnings and future cash flows to investors and other users, some revenue and income should be recognized each year during the progress of these types of production.

The accounting method that is used to recognize revenue during the production process is called the percentage of completion method. Revenue may be recognized during production if the sales prices and estimated completion costs are measurable with sufficient reliability. At the end of each accounting period, the total contract price is compared with estimated total construction costs, and the estimated total income on the project is determined. In some instances total estimated income may change from period to period because estimated total construction costs may change as construction progresses. Once estimated total income on the project is determined, the portion of the total income that should be recognized to date is calculated. This calculation is based on some measure of the percentage of completion of the total project.

When sales are made on credit and there is no reasonable basis for estimating uncollectibility, revenue may be recognized as collections take place and the instalment method of accounting is appropriate. Under the instalment method, gross profit (sales less cost of goods sold) arising from the sale is deferred

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and recognized as cash collection take place. It should be clear why a gross profit percentage, is used to recognize profit under the instalment method. Since the instalment receivables balance, net of the deferred gross profit, represents the unrecovered cost of the assets sold, only those costs that normally would be considered inventoriable costs are included in the calculation of deferred gross profit.

Under the cost-recovery method, no income is recognized on credit sales until the cost of the merchandise sold has been fully recovered through cash collections. After the cost of the merchandise sold has been recovered from cash collections, all remaining cash collections are reported as income in the period in which they are collected. The cost-recovery method also is used by many companies when there is significant uncertainty about the profitability associated with a new or specific venture or contract.

Many service transactions result in an initial inflow of receivables instead of cash. when there is no basis for estimating collectibility of the receivables, a cash-collection method is to be used [15, pp. 247–265].

Exercise 1. Find false statements and correct them.

1.The two revenue recognition criteria usually are satisfied at the point of sale.

2.To provide timely information about earnings in longterm projects revenue and income should be recognized when a project is completed.

3.They use the cost-recovery method to recognize revenue during the production process.

4.When sales are made on credit the instalment method of accounting is appropriate.

5.To recognize profit under the instalment method a net profit percentage is used.

6.Under the cost-recovery method income is recognized when the cost of the merchandise has been fully recovered.

7.Revenue from service transactions is recognized under the cash-collection method.

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Exercise 2. Speak on revenue recognition and income determination.

Exercise 3. Read Texts A and B and speak about:

a)the nature and measurement of revenue;

b)the realization principle as a guideline for determining when revenue should be recognized;

c)the criteria of the realization principle;

d)the percentage of completion method;

e)the differences between the instalment method and the cost-recovery method.

III. Read Text C and entitle it in a different way.

TEXT C

Real Estate Sales and Retail Land Sales

Real estate sales often involve relatively small down payments, perhaps 20 per cent or less, and an extended period of time, perhaps 25 years or more, for payment of the balance due.

Because of the lengthy payment period, uncertainty about the collectibility of payments on a real estate sale may be greater than is typical for many other types of sales transactions. Also, the seller may be required by the contract to perform significant services after the sale, such as managing or maintaining the property.

Thus, many real estate transactions may not meet the revenue recognition criteria at the time of the sale. There may be a substantial number of services to be incurred. In addition, uncertainty about the collectibility of payments due may make it difficult to estimate the amount of revenue that will be received. Hence, it may be necessary to postpone recognition of all or part of the revenue until the revenue recognition criteria are met. Until the services are performed, collections should be recorded as a deposit (unearned revenue). Even after the seller has performed the required services, the instalment sales method or the cost-recovery method may be appropriate for recognizing revenue if estimates of uncollectibles are not possible.

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Retail sales of undeveloped land are similar to real estate sales except that the volume of sales usually is much greater, the size of the down payment usually is a smaller percentage of the sales price, and the seller usually agrees to develop the land by subdividing the property, obtaining regulatory approvals, selling the lots, and making improvements such as grading, landscaping, paving, and other property enhancements. Furthermore, the sales contract generally is unenforceable (the seller’s only recourse is repossession of the property), and the purchaser may have refund privileges for a specified period of time.

Revenue should be recognized on retail land sales only when the following conditions are met: the refund period has expired, the cumulative payments equal or exceed 10 per cent of the sales price, the receivables are collectible and are not subordinate to new loans on the property, and the seller either is not obligated to make improvements on the lots sold or has made progress on improvements promised. Cash received before the above conditions are met should be recorded as a deposit (unearned revenue). [15, p. 270]

Exercise 1. Read the text again and find the differences between real estate sales and retail land sales.

Exercise 2. Give a summary of Text C using the following words and word combinations.

Down payments, balance due, sales transactions, significant services, to meet, payments due, to subdivide the property, approvals, lots, improvements, to be unenforceable.

IV. Translate Text D in writing with a dictionary.

TEXT D

Barter Transactions

Inflation and other economic circumstances have caused many companies to engage in barter transactions. For example, an automobile dealer may enter into an agreement with a cleaning service company to sell a truck in exchange for cleaning

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services to be received over an extended period of time. As another example, broadcasters often barter unused airtime for goods and services. Some companies derive a major portion of their revenues from barter transactions that result in inflows of nonfinancial assets or services instead of cash. Since revenue transactions normally result in cash inflows, some interesting questions arise: Should revenue be recognized on these barter transactions? If so, how is it to be measured? From another perspective, if revenue recognition is deferred until an expected cash inflow materializes, what effect does this delay, which may extend over several periods, have on the timeliness of earnings reporting?

No revenue recognition guidelines currently exist specifically for barter transactions. It appears that the nature of a barter transaction differs little from that of a sales transaction. Therefore, perhaps revenue should be recognized and measured at the exchange price (called a trading unit in barter transactions) established in the transaction. Accounting for barter transactions presents some real challenges to accountants and raises some interesting theory questions. It is likely that we will see growing numbers of these types of transactions. [15, p. 270]

Exercise 1. Match the words on the left with the definitions on the right.

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Exercise 2. Choose the correct ending or answer.

1.Retained earnings are ...

a)current assets;

b)fixed assets;

c)intangible assets;

d)current liabilities;

e)owners’ equity.

2.Accountants can exercise discretion in ...

a)the timing of revenue recognition;

b)their choice of depreciation method;

c)their choice of inventory evaluation;

d)the determination of allowance amounts;

e)all of the above.

3.Being a good employee requires ...

a)being a professional;

b)using time wisely;

c)using discretion;

d)showing respect for your job;

e)all of the above.

4.When a computer tracks balances due from customers and produces a report highlighting products that are selling well, it is being used in which of the following applications?

a)book-keeping;

b)accounting;

c)reporting;

d)invoice auditing.

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ORAL SPEECH SECTION

Exercise 1. Read the illustrative dialogue and decide if the company’s working capital is controlled effectively.

Illustrative dialogue

The Primrose Managing Director continues his discussion with the Financial Controller.

FC: Now in last year’s figures, there was a 21 per cent increase in operating expenses. The worst increase was in the interest paid to the bank because of government stupidity in raising interest rates.

MD: Then, of course, administration went up, but only by seven and a half per cent.

FC: Yes these overheads wouldn’t have been so bad but for the large inventory increases. These together with the steep rise in labour costs and factory overheads raised the total cost of sales by 27 per cent.

MD: This meant our gross profit margin fell to only 27 per cent of sales. And the break-even point rose to $2,333,000, an increase of 39 per cent over last year’s figure.

FC: In other words you would have needed an extra $656,000 of sales just to cover the increase in your operating expenses.

MD: OK. I understand what you’re saying, but what do you think caused the fall in the gross margin? I thought that extra sales of the Vik Energy Saver would produce even more profit. But the opposite has happened.

FC: Yes, clearly the gross margin on the Vik is too low. We must look at the figures in more detail – especially the costs.

MD: That reminds me. Our borrowing costs – the bank manager rang me yesterday saying that he was worried about the increase in our overdraft. Why has our borrowing gone up so much since last year?

FC: Well, mainly because we’ve been borrowing extra working capital and the costs of extra storage and personnel. Let’s have a quick look at the 2010 Balance Sheet.

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MD: All right. But make it quick! I’ve got a meeting with a customer in ten minutes.

FC: Well, this shouldn’t take a minute. Our inventories were 40 per cent higher in 2010 than in 2009 and the customer receivables were up by 31 per cent. But note that sales rose by only 20 per cent. So we must control our working capital more effectively. On the other hand we ended 2010 owing trade creditors 38 per cent more than in 2009, so the extra credit you got from them was financing most of the increase in the current assets. The rest, $90,000 was covered by the extra money we borrowed from our bank.

MD: Yes, I see. But can you give me any suggestions for action now? I want to tell the managers as soon as possible.

FC: Well, I suppose we could reduce sales of the Vik Energy Saver, and try to increase the margins on all the other products. That would reduce our turnover, but it would certainly improve the profit situation.

MD: Cut turnover! Is this some kind of joke? What do you think head office in Birmingham would say?

FC: No, I’m quite serious. Just think about it. Our sales will fall but we’ll be selling mostly products with higher gross margins. I know we won’t be able to reduce some costs, particularly those which are fixed – they don’t change with the sales volume, but overall we would end up with more dollars of profit. And our return on capital will certainly improve.

MD: That’s rather difficult to follow. FC: Is it?

MD: Could you go over that again?

FC: Certainly! It’s easy to work out. If we could raise our gross margin to 33 per cent... [20, p. 108–109]

Notes:

operating expenses – эксплуатационные расходы stupidity – глупость

overheads – накладные расходы

gross profit margin – коэффициент валовой прибыли

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Exercise 2. Give short answers to these questions.

Model 1: Who does the Primrose Managing Director speak with?

– With the Financial Controller.

Model 2: What are they discussing?

–Last year’s figures.

1.What was the worst increase in?

2.What overheads were the worst?

3.What helped to raise the total cost of sales?

4.How much did the gross profit margin fall?

5.What caused the fall in the gross margin?

6.Who was worried about the increase in overheads?

7.Why did the company’s borrowing go up?

8.Who proposed to reduce sales?

9.What would sales reduction influence?

10.What figures don’t change with the sales volume?

Exercise 3. Explain the meaning of the following words. Make use of the words in brackets.

Model: Маркетинг (buyers, sellers, process, find, by, which) Marketing is a process by which sellers find buyers.

1.Ссуда (lent, a sum, a bank, a company, a person, by, to)

2.Накладные расходы (a business, to keep, running, money, regularly, spent)

3.Товарооборот (the amount, period, particular, money, in, measured, business, of, a, done)

4.Прибыль (trade, business, gained, money, by)

5.Стоимость (money, the amount, of, buying, producing, something, needed, for)

Exercise 4. Replace the words in italics by synonyms.

Model: I suppose we could reduce sales.

I believe we could reduce sales.

1.The administration went up by 7 per cent.

2.The bank manager was worried about the increase in overdraft.

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