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Financial Accounting: Revenue Recognition

The following situation is in chronological order.

1. Flutie decides to buy a surfboard.
2. He calls Surfing USA Co. to inquire about their surfboards.
3. Two days later he requests Surfing USA Co. to make him a surfboard.
4. Three days later, Surfing USA Co. sends him a purchase order to fill out.
5. He sends back the purchase order.
6. Surfing USA Co. receives the completed purchase order.
7. Surfing USA Co. completes the surfboard.
8. Flutie picks up the surfboard.
9. Surfing USA Co. bills Flutie.
10. Surfing USA Co. receives payment from Flutie.

In a memo to the president of Surfing USA Co., answer the following.

a) When should Surfing USA Co. record the sale?
b) Suppose that with his purchase order, Flutie is required to make a down payment. Would that change your answer?

Also see attachment.


Solution Preview

The attached MS Word document also contains the solution to the problem. Please use this document only as an example to refer to when writing your memo for this assignment.


Surfing USA Company

Dear Sir:

As you may know, the financial statements for Surfing USA Co. are prepared according to generally accepted accounting principles. One of these principles is the revenue recognition principle, which states that ...

Solution Summary

This solution is comprised of a financial accounting, critical thinking, and communications activity dealing with the following questions:

1) When should revenue be recorded?
2) When should revenue be recognized?
3) If an advanced down payment is made, does this change how revenue is recognized?

The instructions to this problem required the questions be answered in a memo. The required memo presents the revenue recognition principle as stated under the generally accepted accounting principles.

The problem shown here is taken from Financial Accounting, 6th ed., Wiley Publishing, however, the detail step-by-step explanation of this topic provides students with a clear understanding of the concept.

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