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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Ethics and Revenue Recognition

Alan Spalding is CEO of a large appliance wholesaler. Alan is under pressure from Wall Street Analysts to meet his aggressive sales revenue growth projections. Unfortunately, near the end of the year he realizes that sales must dramatically improve if his projections are going to be met. To accomplish this objective, he orders his sales force to contact their largest customers and offer them price discounts if they buy by the end of the year. Alan also offered to deliver the merchandise to a third-party warehouse with whom the customers could arrange delivery when the merchandise was needed.

Required:

Do you believe that revenue from these sales should be recognized in the current year? Why or why not?

To determine

Revenue recognition:

Revenue recognition is referred to the time of recognition of revenue by the business firms in the books for stating the respective revenue in the statement of profit and loss in the respective year and time. It does not make difference whether it is received or not.

Accrual Accounting:

In accrual-accounting method, the revenue is recognised at the point of sale i.e. when the possession is transferred to the customer.

The time of revenue recognition of the sales.

Explanation

The revenue recognition can be recognized of the sales made by the Alan, the CEO of a large appliance wholesaler, if he made his customers to buy at the end of the year with the discount policy even after not receiving the payment of those sales i.e. on accrual basis but the condition is that the sale process is completed and the possession is transferred to the customer...

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