Revenue Recognition Case

Recognition is the process for formally recording or incorporating an item in the financial statements of an entity as an asset, liability, revenue, expense, or the like. Recognition consist both initial recognition of an item and the subsequent changes in or the removal of a previously recognized item. The criteria in this statement is derived from the previous concept statements 2 and statement 3. For an item to be recognized, it should meet four fundamental recognition criteria. The four fundamental criteria are definition, measurability, relevance, and reliability. All four criteria are subject to a cost benefit constraint and a materiality threshold. The expected benefits from recognizing an item should justify the perceived cost of providing and using the information. Furthermore, an item and the information about it do not need to be recognized in financial statements if the item is not large enough to be material and the aggregate of individually immaterial items is not large enough to material to those financial statements. It is noted that the fundamental criteria apply to all recognition descisions.

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

Revenue recognition is one of the top causes for financial statement restatements. In addition, revenue recognition is an area commonly questioned by the Securities and Exchange Commission (SEC) staff in their review of public filings and resultant comment letter process. Furthermore, revenue recognition is often prey to financial fraud.

A contingency that might result in a gain usually should not be reflected in the financial statements because to do so might be to recognize revenue before its realization.

f) To evaluate the material misstatement in the accounts, I think both of the consolidated income statement and the three financial statements are useful. We need to use the information properly from all the financial statements. However the consolidated income statement is the most useful one. If there is a significant change in an account balance comparing with preceding two years, the auditor will examine whether there a material misstatement exists. For instance, the bad debt expense as a percent of net sales in 2011, 2010 and 2009 are 0.56%, 0.70% and 0.69%, respectively. There should

In this paper I have defined accrual and cash basis accounting. Also, I have answered the following questions: Explain the difference between the accrual basis of accounting and the cash basis of accounting. What are the major reasons for using accrual accounting? What are the purpose of a journal and a ledger? Give an example of a contra-asset, and explain how it is recorded on the ledger as a transaction. Explain what a “prepaid expense” is and how it is recorded on the ledger as a transaction. What are the major differences in recording transactions for a for-profit organization versus a not-for-profit, or are there any? List and record each transaction

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,

For example the extra charge for maintenance accumulated from last year and for this year should be equally divided and not charged to the first quarter only. Similarly, cost of relocating the Southern Paper Sioux Springs office that has been charged to the first quarter, had been the expenditure incurred last year. It should not have been included in the first quarter. No doubt these are good accounting practices but nevertheless reverting the charges to their respective results would not compromise GAAP practice. Unrealized income would be better off transferred to the next or the last quarter as the income received would not materialize until at the end of the year. Including the dividend from the company's Brazilian unit would not help increase profitability at the end of the year unless the company is assured of its profitability. As of now it needs to balance its accounts before it can estimate correct profit level at the end of the year. With regard to the obsolete inventories, there is no alternative course of action but to write-off from this

Ignoring the revenue recognition principle could end up distorting an entity's balance sheet/statement of financial position. It is important to note that without adherence to this principle, it could be possible for entities experiencing a decline in sales to hide such an occurrence by modifying some items. In such a case, a refundable cash inflow i.e. a deposit used as security for the possible completion of an agreed upon task at a specified future time could be recognized as revenue. Under this principle, such an inflow should ideally be recognized as a liability and later as revenue only after the said task has been completed.

Information based on accrual accounting has historically and empirically provided a better indication of a company’s ability to generate cash flows than information gathered under the cash method. If there is not inter-period allocation, then the information is not as meaningful and will result in a mismatching of economic benefits

This accounting policy will improve the preliminary financial statements drastically. Net income will be substantially higher; rather than expensing everything right away, we are matching the expenses with revenues. This better represents the earnings of the company. Additionally, the balance sheet will be show a higher amount of assets due to the capitalization of expenses. This will increase asset-to-debt ratios and improve the attractiveness of the company to investors.

Revenue recognition is currently one of the most complex areas of accounting, however it hasn’t always been this way. From relatively simple beginnings, the guidance for recognizing revenue has grown larger and more complex along with the business environment. One reason revenue recognition has needed frequent improvement is its vulnerability to fraud. It has been recorded that several frauds during the 1987-2007 time period were a result of an overstatements of revenue, typically at the end of an accounting period in an effort to boost earnings. This fact shows the importance of rigorous revenue recognition guidelines, while further demonstrating a need for the revenue recognition project. There was also a need to clarify the differences in

According to the annual report 's financial statement notes, CV Technologies (CVT) recognizes revenue when the title of goods is passed on to the customer, and when reasonable assurance exists regarding the measurement and collection of the consideration given. This means that once CVT ships its goods to their reliable customers, they will account for those goods as sold, and recognize the contract amount as revenue. This policy, although it is slightly aggressive, does adhere to GAAP, but it does require a look at other financial statement accounts for its efficiency and suitability for the company. Since CVT is operating on credit, it is imperative that the

• A customer comes into your repair shop and needs front and back brakes and rotors. Under the cash method, you do the repairs and the customer hands you a credit card (or check or even a stack of cash). You record it into your point of sale system and the money is recorded as revenue. But if the customer has an account with your business and doesn’t hand you the money until the beginning of the next month the transaction will not be recorded as revenue until

Accounting is generally intended to show a correlation between all financial aspects of business transactions. (Neil Kokemuller). It runs the risk of counting money earned but not collected when company records revenue from sales paid for with credit. The likelihood of this risk is adjusted by the bad-debt allowance. Misalignment between revenues earned in one period and the unpaid debt that result later on would happen due to the failure to use bad-debt allowance. Significant cuts to revenue in later period would happen in the company.