Lucent Case Q3 Essay

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3. How would you judge whether a firm is likely to face revenue recognition problems? Revenue recognition issues are the subjects of headlines in our daily newspapers, primarily because major corporations have recognized revenues that did not meet its revenue recognition rule. For businesses that use cash basis accounting, revenue recognition is a simple process; a sale equals revenue, but not for companies that use accrual basis accounting. The more complex the business, the more specialized the industry, the more difficult the decision becomes for that business as to when to recognize earnings. Revenue recognition is one of the areas where managers can exercise their accounting discretion to achieve certain objectives. By looking at…show more content…
Lucent's revenue for the second, third, and fourth quarters respectively are $10, 256 to $8,713 to $4,939 (Exhibit 4 - Consolidated Income Statement) and inventory in the same quarters are $5,321, $4,936, and $5,677 (Exhibit 4 - Consolidated Balance Sheet). Due to rapid growth in the communication equipment industry from technological advances and intense competition according to the case Lucent failed to foresee the sudden switch to fiber-optic network and lost a their share of market to their competitors such as Nortel Networks, Inc. Third red flag is unexplained transactions that boost profits. A treatment of sale of medium- to long-term financing guarantees, which Lucent made to its customers, to financial institutions is one of them. While this arrangement may have sound business logic, it gave the management an ability to keep these loans of the balance sheet and understated its liabilities thus overstating its equity. Meanwhile, the company continued to extend credit to customers, according to the case $1.6 billion extension of credit was finalized in agreement with a customer in addition to $1.8 that was already extended. Thus increasing accounts receivable that reflects on allowance for bad debt that the company underestimated and had to increase it by $252 million in the last quarter of 2000. Looking at the financial statements and the disclosers, we
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