Chapter06acountingmcgill.ppt

* 2 2 * 2 2 Going concern problem we think the company is not gonna be around after a year. Suddenly the company stock goes down What method we use accrual. Going bancrupt they use liquidation basis Cost – accu If we do at liquidation is how much we get if we sold it today Liquidation value analysis not based on accrual * 2 2 If it’s a new area hard to know when will come back * 2 2 Franchise is up and running then the revenues can be recognized * 2 2 2009 contact 10,000000 estimated total cost 8000,000 actual cost 2000,000 2010 estimated total cost 9000,000 actual cost 100,000 2011 estimated total cost 9000,000 actual cost 7100,000 Accrual % Completion Completed Contract 2009 Sales 10,000,000 Contract price 10,000,000 0 COGS 8000,000 Estimated cost 8000,000 Profit 2000,000 Estimated Profit 2000,000 Actual cost to date 2mil/8mil completion 25% Est, total cost 8000,000 profit to date 500,000 previous profit 0 2008 profit 500,000 2010 None Contract price 10,000,000 Est Total Cost 9000,000 Est total profit 1,000,000 Actual cost to date/ Est total cost 2100,000/9000,000 = 23% Profit to date230,000 Previous profit (500,000) this year have a current year loss 270,000 0 2011 Loss 1200,000 Contract Price 10,000,000 Estimated Total Cost 9200,000 Est Profit 800,000 Actual cost to date 9200,000 Est Total Cost 9200,000 100% Profit recognize to date 800,000 Previous profit 230,000 Profit 570,000 800,000 Tricky part is that on percentage completion u can have a loss Estimated total cost is higher than contract price have loss under both methods on % and completed * 2 2 Value chain = things that add value to a business RD we expense but we don’t get the benefit out of it till years later. Matching problem Don’t get value now but we expense now. Troubles matching them * 2 2 High tech a lot of RD pharmaceutical * 2 2 * 2 2 Know which method if its full cost of successful