Revenue Recognition and a Matching Concept - 1159 Words

Revenue Recognition Matching Concept Part I Revenue recognition is a significant issue in accounting because of integrity and fairness in the financial statements that are depended upon by investors, creditors, and other financial statement users. When revenue is not properly recognized in financial statements, material misstatements can occur, which misleads users. Even though the matching principle is not the same as revenue recognition, it is related in the sense of matching expenses spent to revenues earned from the expenses, or revenues to expenses that generated the revenues. Revenue recognition is a primary cause of financial statement restatements, are related to fraudulent behavior, cause market value and capitalization drops, and cause higher enforcement efforts to ensure fairness and integrity in financial statements (Kieso, Weygandt, Warfield, 2008). Most fraud cases that involve company executives involve revenue recognition is some manner, whether to steal company money and hide the actions or in efforts to meet financial analysts expectations to maintain stock prices and still maintain job positions and bonuses. Each case has led to material misstatements where financial statements had to be restated with SEC, caused market and capitalization drops for the companies, and caused higher enforcement efforts by SEC. And, each case has effected financial statement users and has caused uncertainties in minds of investors, which compromise the companies. WhenShow MoreRelatedAnalysis of Smith Companys Income Statement for December 2012655 Words   |  3 PagesSmith Company Income Statement For December 31, 2012 Revenues $370,500 Less Cost of Goods Sold 254,000 Gross Profit 116,500 Less Expenses Depreciation Expense $24,350 Insurance 1,400 Marketing 4,500 Property Taxes 8,900 Rent 18,000 Salaries 67,500 Utilities 6,700 131,350 Net Loss $(14,850) When the client had shown interest in the $35,000 worth of products, the original transaction would have been a debit to revenues and a credit to accounts payable. To adjust this transactionRead MoreThe Matching Concept of Smith Company667 Words   |  3 Pagesexplain the relevance of the matching concept. Smith Company Income Statement For the Year Ended 31st Dec 2012 Revenue $406,000 Less C.O.G.S $279,500 G/P $126,500 Less expense Depreciation expense $24,350 Insurance $1,400 Marketing $4,500 Property taxes $8,900 Rent $18,000 Salaries $67,500 Utilities $6,700 $131,350 N/P ($4,850) Workings C.O.G.S $234,000 Add back closing stock $45,500 $279,500 The Matching Concept: Its Importance The matching principle in the words of NikolaiRead MoreFinancial Accounting1510 Words   |  7 Pagesfive page paper. Please make sure this paper is well organized and covers all of the items below. Part I.      * Why is revenue recognition a significant issue? How do we determine when revenues are recorded for accounting purposes? * Explain the difference between a product and period expense. * Discuss the matching concept as it relates to accounting for revenues and inventory.    Part II.   Refer to the latest annual financial statements for the two following companies:  Apple: http://investorRead MoreGenerally Accepted Accounting Principles (G.A.A.P)1020 Words   |  5 Pagesinternational convention of good accounting practices. It is based on the following core principles. In certain instances particular types of accountants that deviate from these principles can be held liable. The Business Entity Concept The business entity concept provides that the accounting for a business or organization be kept separate from the personal affairs of its owner, or from any other business or organization. This means that the owner of a business should not place any personal assetsRead MoreThe Significance and Application of the Revenue Recognition Principle1079 Words   |  4 PagesThe Revenue Recognition Principle: Its Significance and Application 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 derivesRead MoreAccrual Basis Of Accounting Over Cash Basis1534 Words   |  7 PagesIntroduction There has been a significant debate focusing on costs and benefits of adopting accrual basis of accounting over cash basis of accounting. This paper illustrates the concepts of accrual basis of accounting, highlights the benefits of accrual basis of accounting posed by its advocates and also briefly discusses the disadvantages of adopting accrual basis accounting. The paper also briefly discusses the recent accounting scandal of Tesco Plc. which showed that profits of the company wereRead MoreApple Inc vs. Philips: Financial Analysis996 Words   |  4 PagesPart 1 Revenue Recognition The revenue recognition principle according to Weygandt, Kimmel and Kieso (2009), dictates that companies recognize revenue in the accounting period in which it is earned. The reporting of revenue generally affects not only the results of the operations of a given entity but also its financial position. In that regard, the relevance of understanding both the concepts as well as practices of revenue recognition cannot be overstated. In the words of Nikolai, Bazley andRead MoreAssets, Liability, Owners Equity and the Accounting Concepts1211 Words   |  5 Pageskeeping the books of business, a company must decide the amount to for assets purchased and liabilities incurred. The amount that a company should record assets and liabilities are at the historical cost principle. Historical cost principle is a simple concept which means that the data you see on the balance sheet is recorded at the historical cost. The historical cost is therefore the cost at the time the company or entity com pleted the transaction. Historical cost accounting is therefore the oppositeRead MoreThe International Accounting Standards Board Essay1506 Words   |  7 PagesUS-GAAP  include  (1) entity  concept, (2) going concern, (3) matching principle, (4) conservatism,  (5)  cost principle, (6) objective evidence, (7) materiality, (8)  consistency and (9)  full disclosure, which are explained in detail below.   1) Entity is defined as the â€Å"person or organization that is the focus of attention†Ã‚  (Finkler et al., 2013, p. 103). While a HCO may be the entity, there are sub-entities  comprised of individual units or service lines.   The entity concept indicates that  there shouldRead MoreAccrual Accounting : An Accounting Method1285 Words   |  6 Pagesregardless of when cash transactions occur. They are documented by matching revenues to expenses at the time in which the transaction occurs rather than when a payment is processed. This method allows the current cash credits and debits to be combined with future expected cash flows to give a more accurate picture of a company s current financial state. It is ideal to use this method of accounting if an organization has a revenue of more than five million per year. While the accrual method shows