CPA Explains Revenue Recognition Under GAAP Rule | With Examples
Top 20 Accounting Interview Questions and Answers
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Part 1 – Core Accounting Questions
Question #1- What are the pre-requisites of revenue recognition?
Revenue can be recognized when the following criteria are fulfilled:
Delivery of product can be determined easily with the help of the Goods / Material Receipt Note or the Lorry Receipt. But in the case of delivery of services, this seems to be a bit tricky because there might not be a physical transfer of property/goods in this case. So to ensure services have been delivered, timesheets of people who have worked on the project, the final design, or such deliverables can be used as a reference.
Question #2 – How important is documentation when it comes to accounting?
If you can prepare a list of all critical/vital documents for the sector you are going to an accounting interview, it will help you win very good brownie points with the interviewer.
Question #3 – What are Accounting Standards?
Question #4- What is a FIXED ASSET register?
A summarized form of a Fixed Asset Register which will form a part of the Financial Statements, is as follows:
Physical verification of fixed assets should be done regularly, and comments from these verifications should be updated accordingly. There are times when the asset is recorded in the books, but there is no such asset physically.
Question #5- Which accounting software / ERP, according to you, should be used for maintaining the Accounts of an MNC?
Accounting software sets the foundation of accounting in any organization, and it is crucial to choose software that suits the organization’s needs.
However, the cost of SAP is on the higher side. It is the trade-off between risk and returns, which justifies the high cost of the ERP given the volume and scale of the business.
It is important to make yourself clear about the organization’s size and then correlate the usage of the ERP with the size. This is required because if you are interviewing for a start-up where survival is the focus rather than the effectiveness of controls, they will prefer Tally, which will be very cost-efficient.
Question #7 – Explain the procurement process in brief
Goods will be delivered at the warehouse/place of delivery, and a material receipt note will be created. Purchase can thus be accounted for in the books if everything is in line with the PO or contract. Payment will then be released as per the payment terms.
Some of the key documents which should be thoroughly verified during the accounting process are:
Question #8 – What, according to you, is the importance of budget in any organization?
The budget sets the tone for the organization, i.e., what is the approach to the management for the coming year? Is the management planning to be aggressive with its sales targets or planning to cut down costs, or wants to maintain a steady pace just like last year? It is also very important to check expenses and create a culture where employees start taking responsibility. Employees tend to be careful with their approach as they know that all current year numbers will be tracked and then compared to the budgets allotted to them and their team.
Question #9 – What are the expense provisions? Is it important to book these provisions?
Very put, provision is an amount of profit put aside on the books to cover an expected / potential expense in the foreseeable future. In day-to-day accounting, there is a high chance that expenses already incurred in the given period may not be booked. The reasons for this could vary, e.g., the vendor is yet to raise an invoice, or let’s say that the invoice is raised once in 6 months only, and at the year-end, we have already availed services of 3 months. A provision should be created in the books for these expenses, which we have already availed. Expenses incurred in a given financial year should be booked in the same year to maintain the true and fair view of the financial statements. But it can’t book expenses for any reason; then, the provision is the next best thing to do.
Accountants are prudent, and thus the effect of losses/expenses is taken into the books even if there is a potential expense. Still, on the other hand, potential revenue is not taken into the books. Keep this in mind because there is a trick question about the provision of income that you expect to incur in the future.
There are essentially four areas to consider when accounting for PP&E on the balance sheet: initial purchase, depreciation, additions (capital expenditures), and dispositions. In addition to these four, you may also have to consider revaluation. For many businesses, PP&E is the main capital asset that generates revenue, profitability, and cash flow.
The revenue recognition principle dictates the process and timing by which revenue is recorded and recognized as an item in the financial statements based on certain criteria (e.g., transfer of ownership). The matching principle dictates that the timing of expenses be matched to the period in which they are incurred, as opposed to when they are actually paid.
Negative working capital is common in some industries, such as grocery retail and the restaurant business. For a grocery store, customers pay upfront, inventory moves relatively quickly, but suppliers often give 30 days (or more) credit. This means that the company receives cash from customers before it needs the cash to pay suppliers. Negative working capital is a sign of efficiency in businesses with low inventory and accounts receivable. In other industries, negative working capital may signal a company is facing financial trouble.
Cash is king. The cash flow statement gives a true picture of how much cash the company is generating. That being said, it’s important to note that all three statements truly are required to get a full picture of the health of a company. Learn more about how the three financial statements are linked.
Step back and give a high-level overview of the company’s current financial position, or companies in that industry in general. Highlight something on each of the three statements. Income statement: growth, margins, profitability. Balance sheet: liquidity, capital assets, credit metrics, liquidity ratios. Cash flow statement: short-term and long-term cash flow profile, any need to raise money or return capital to shareholders.
Do your contracts with customers include a software license?
An important factor for revenue recognition is to determine if the agreement includes a software license or is a ‘software-as-a-service’ (SaaS) arrangement. Per the new standard, a software license is not present in an agreement unless the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty. It must also be feasible for the customer to either run the software on the customer’s own hardware or contract another party, unrelated to the entity, to host the software.
It is important for software companies to make this determination, as the licensing guidance does not apply to SaaS arrangements. SaaS arrangements are accounted for as service obligations, which are subject to the general revenue model and the related revenue is typically recognized ratably over the term of the agreement.
If the agreement does include a software license, the full portion of the transaction price that is allocated to the license may be recognized once control of the software license has been transferred to the customer at the beginning of the license term. The remaining transaction price may be allocated to other performance obligations, such as implementation, hosting, and post-contract support services, and is typically recognized over time. Usually, a greater portion of the transaction price is allocated to the license, which may result in fluctuating earnings or “lumpy revenue,” depending on the timing of the sales and term of the agreements.
FAQ
What are the 5 steps of ASC 606?
- Identify the contract with a customer. …
- Identify the performance obligations in the contract. …
- Determine the transaction price. …
- Allocate the transaction price. …
- Recognize revenue when or as the entity satisfies a performance obligation.
What do I need to know about ASC 606?
What is the core principle of ASC 606?
What are the 10 most common interview questions and answers for accounting?
- Why do you want to do accountancy?
- Are you able to convey technical information to someone of more or less technical ability? Please give an example.
- What are your strengths and weaknesses?
- Can you give examples of when you’ve helped a team be successful?
- Why do you want to work for this firm?
