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
This is not in compliance with the provisions of GAAP or SAB 101. Revenue should not be recognized until it is realized or becomes realizable and earned. If we followed this statement the company did not have realized revenue Furthermore, the penalty payments if enforced could not be paid till the year 2005 as stated in the contract. Also, the journal entry resulted in recognizing revenue when it was not earned or
Coverage of revenue recognition in intermediate accounting courses is typically limited to learning and applying the criteria for revenue recognition outlined in the Financial Accounting
The major benefit of this proposal is that agreement exists that there is more objectivity in measuring and determining changes in assets and liabilities than there is in measuring and determining the completion of the earning process. After taking comment letters on the discussion paper of December 2008 and an initial exposure draft in June of 2010, the boards issued a revision of the proposal in “Proposed Accounting Standards Update (Revised), Revenue Recognition (Topic 605) – Revenue from Contracts with Customers: Revision of Exposure Draft Issued June 24, 2010.” The new document left the basis of the proposal the same and added implementation guidance and a tentative date for adoption. Recognizing revenue under the standard would be a five-step
New accounting rules will affect the company’s revenue recognition in the upcoming year. Many companies such as Rolls-Royce Holdings will be affected by this change. Rolls-Royce Holdings books its revenues even before its services performed. For instance, they sell large engines and maintenance service, and Rolls-Royce Holdings booked the revenue even 1.5 years in advance. They will no longer able to book this unperformed revenues for the upcoming year. The investors will have a better picture on the firm’s revenues based on the new revenue recognition. Some sectors, such as telecommunications, media and pharmaceuticals, are expected to be affected more than others, because the firms recognize revenues before they perform the services. Moreover,
2. On the basis of the response to Question 1, discuss the revenue recognition accounting literature
Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded when?
The false recognition of revenue and absence of incurred expenses
According to Kimmel, Kieso and Waygandt (2011), "the revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned." Basically, this means that revenues should be recognized (or in other words recorded) on completion of the process of revenue generation i.e. once revenue has been earned. This is as per the accrual basis of accounting. Essentially, revenue recognition derives its significance from its utilization when it comes to the determination of the specific accounting period in which earnings should be recorded.
5. Should the company seriously consider any other options besides doing a spin-off or issuing targeted stock?
The accounting practices at Carlton normally permit revenue recognition after the shipment of the computer systems. Peale, Gower and Quill, Carlton’s auditors, are worried about the accounting practices regarding revenue recognition of certain transactions during the
Timing of revenue recognition is a crucial part in revenue recognition. According to US GAAP, revenue should be recognized when it is realized/realizable and earned (FASB, 1984, Para. 83).
$24.7bn. Why do you think the market reacted so negatively to Lucent’s announcements of the
Revenue from the provision of goods and all services is only recognized when the amounts to be recognized are fixed or determinable, and collectability is reasonably assured (Elliot B., Elliot J., 2007)
3. What are the biggest risks faced by the firm in the next 5-10 years?
The revenue recognition principle is a foundation of accrual accounting and one of the main principles of GAAP. The revenue recognition principle is a set of guidelines that helps accountants to identify when a revenue event has taken place and how to appropriately record cash exchanges before, during, and after the revenue event. According to the revenue recognition principal, revenue must (1) be realized or realizable and (2) earned, in order to be recognized. According to the SEC revenue is realized when (1) Persuasive evidence of an arrangement exists, (2) Delivery has occurred or services have been rendered, (3) The seller’s price to the buyer is fixed or determinable, and (4) Collectability is reasonably assured. It is essential