Question

Company A collected layaway payments from customers and reported revenue as the customers made each payment (as cash was received). Company B recorded no revenue until the full purchase price had been paid and the customer took possession of the merchandise. Assume both companies had $50,000 owed by customers for layaways, which was payable in equal monthly payments over a 8 month period from September of Year 1 through April of Year 2 at a total of $6,250 per month.

Determine the amount that will be reported for each of the financial statement items listed below under the two layaway revenue recognition policies for Year 1 and Year 2:

a) Revenue

b) Cash flow from operations

c) Total liabilities

Answer 1

Company A record cash received as revenue while company B is record cash received as Current liability and at end of April company record full amount as revenue.
Revenue	Company A	Company B
September Year 1	6,250
October Year 1	6,250
November Year 1	6,250
December Year 1	6,250
Total revenue For Year 1	25,000	0
January Year 2	6,250
February Year 2	6,250
March Year 2	6,250
April Year 2	6,250	50,000
Total revenue For Year 2	25,000	50,000
Company A record cash received as revenue (revenue is part of Cash flow from operations) while company B is record cash received as Current liability (Current liability is part of Cash flow from operations).
Cash flow from operations	Company A	Company B
September Year 1	6,250	6,250
October Year 1	6,250	6,250
November Year 1	6,250	6,250
December Year 1	6,250	6,250
Total Cash flow from operations For Year 1	25,000	25,000
January Year 2	6,250	6,250
February Year 2	6,250	6,250
March Year 2	6,250	6,250
April Year 2	6,250	6,250
Total Cash flow from operations For Year 2	25,000	25,000
Company A record cash received as revenue (No liability in company A.) While company B is record cash received as Current liability (Current liability is part of total liability.)
Revenue	Company A	Company B
September Year 1	0	6,250
October Year 1	0	6,250
November Year 1	0	6,250
December Year 1	0	6,250
Total liability For Year 1	0	25,000
Beginning balance	0	25,000
January Year 2	0	6,250
February Year 2	0	6,250
March Year 2	0	6,250
April Year 2	0	6,250
April Year 2 (Recognized revenue.)		(50,000)
Total liability For Year 2	0	0