Case 5 2 grennell farm

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Case 5 2 grennell farm

This case has been updated from the Tenth Edition. Approach This case is a good illustration of a situation where revenue recognition is not a cut-and-dried question. It also provides excellent reinforcement of the matching concept and statement articulation. The alternatives discussed are: While either the production method or sales method is acceptable under GAAP, that is really a moot point since Denise Grey is the sole owner of the incorporated farm, and not bound by GAAP.

Once the issue of how much revenue to recognize is resolved, then how much expense to match can be dealt with. Together, these two issues determine how much gross profit Grennell farm will be shown as earning.

Question 1The calculations shown below for Question 1 show the range of sales figures under different recognition methods. I start with the sales method, then do the collection method, and save the more unusual production method until last.

Case 5 2 grennell farm

Unless the instructor for some reason is using this case after Chapter 6, the students may not recognize this as an issue or, if they do, not know how to deal with it in the financial statements. In any event, I think it worthwhile for the instructor to note that these expenses are by definition fixed do not vary with production volumebut that some especially a portion of salaries and wages may be production costs and hence strictly speaking should be used in valuing inventory.

Students often mistakenly use fixed costs and period costs as synonyms.

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Of course, the point of Question 1 is not just practice in revenue and expense matching calculations, but thinking about which is the most appropriate method. For tax purposes, Grey will want to use the collection method. For evaluating the performance of the farm inthe production method would seem most useful.

This is because there is very little uncertainty concerning the eventual sale of the 30,bushel wheat inventory stored at the farm. This inventory exists, not because there are no customers for it, but because the farm manager chose not to sell it, speculating that future prices will be higher.

This is the same reasoning that justifies this unusual revenue recognition method as GAAP; the same method is also allowed for precious metals and other minerals where immediate marketability at quoted prices obtains. Also, many professional service firms e.

October 27, 2018

The name Unbilled Receivables is often used for this account to emphasize that the revenue has already been recognized, even though it has not yet been billed. Exhibit ACollect the cash from the customer Customer acknowledges receipt of the item Ship the product to the customer and send a sales invoice Receive an order for the product from a customer Collection Method Purchase raw materialUsual Method Delivery Method Convert the raw material to a finished productInspect the product Production Method Store the product in a warehouseTo generalize the discussion, I put on the board a cash cycle diagram like the one in Exhibit A to this note.

Starting with purchases, I go around this wheel and add to its interior the three points at which revenue can be recognized: When is the correct point to recognize revenue? This diagram points out that the answer is not clear-cut. Conservatism would say do not recognize the revenue until there is very little uncertainty as to receipt of the cash proceeds, driving the revenue recognition toward the collection point.

Timeliness would argue for recognizing the revenue when the critical event or performance has taken place, in this instance as soon as a certainly salable product has been produced, i.

The measurability of income criterion does not help select a method in this instance, as the Question I calculations are feasible for all three methods. However, again GAAP need not prevail here, for Grey is trying to assess the economic attractiveness of the farm.Modern farmhouse screened in porch with standing seam roof, board and batten siding, and hardscape designed by Tim Brown Architecture.

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Contents PART 1 FINANCIAL ACCOUNTING 1