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Presentation 1

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Transcript

  • 1. PRESENTATION
    • GROUP A
  • 2. Group memebers
    • Aksana
    • Amy
    • Carol
    • Helen
  • 3. A3-1
    • Joel and Krista had a conversation on accounting before they boarded a flight of Delta Airline. Krista said that last year she placed a $750,000 order on December 28, but this sale wasn ’ t included in her bonus for that year . The reason was that the goods would not be shipped until January 3, and that the revenue would be recognized next year. Accordingly, the bonus would not be given to her until next year.
    • Their conversation raised two questions:
    • When should Krista ’ s company recognize the revenue and her bonus?
    • When should Delta Airline recognize the revenue from ticket sales?
  • 4. When should Krista ’ s company recognize the revenue and her bonus?
    • Company ’ s policy:
    • The revenue of a sale is recognized after the goods are shipped.
    • The bonus is recognized after the revenue is recorded.
  • 5. When should Krista ’ s company recognize the revenue and her bonus?
    • Cash basis accounting vs. accrual basis accounting
    Cash basis accounting Accrual basis accounting Revenues Cash is received Revenue is earned Expenses Cash is paid When expenses are incurred (when resources are consumed/used)
  • 6. When should Delta Airline recognize the revenue from ticket sales?
    • Four possibilities:
    • When it sells the tickets
    • When the boarding passes are taken at the door
    • When they get off the plane
    • When their company pays for the tickets
  • 7. When should Delta Airline recognize the revenue from ticket sales?
    • Analysis
    • When it sells the tickets- contract
    • When the boarding passes are taken at the door - “shipped”
    • When they get off the plane - journey completed
    • When their company pays for the tickets - cash payment
  • 8. When it sells the tickets
    • If the Buyer has a right of refund or can apply the ticket purchase to a later flight, revenue should not be recognized until the flight is taken.
    • If it is a non refundable ticket, the airline could properly record the revenue at the time of payment.
    • However, if the flight was cancelled and the Buyer was never able to complete the flight, the airline would have to reverse the transaction.
    • Most airlines would provide an alternative seat and deliver the passenger to their destination. In such a case, no reversal of the sales transaction is necessary.
    • The assumption is that all tickets sold under a non refundable term would be complete at that time as the airline fully intends to fulfill the contract of providing a seat for travel to the customer.
  • 9. When the boarding passes are taken at the door
    • According to the textbook, revenues are normally recorded at the time when a service is rendered.
    • Realistically once the boarding passes are collected, the airline fully intends to provide the airline seat to the passenger and deliver them to their destination.
    • Even for a refundable ticket, most airlines probably would record the transaction as a sale at this point.
  • 10. When they get off the plane
    • Technically speaking revenue should not be recorded until service has being provided (or other ways it still will be recorded as "unearned revenue" under the Liabilities).
    • That is said that Delta Air Lines will record its revenues only when Krista and Joel will get off the plane, because airline has delivered the passenger to their destination, but only if their company already paid for tickets in advance.
  • 11. When their company pays for the tickets
    • If company paid in advance for trip (before their employee took a flight) then its revenue will be recorded after airline has delivered passengers to their destination.
    • But if company paid it after the service has being provided then revenue will be recorded only after Delta Air Lines received this payment.

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