The Issue of Revenue Recognition

The most common practices by which companies misrecognize revenues or expenses be (a) preserve revenue too soon, (b) rendering bogus revenues, (c) using an unrealistically kickoff basis to record revenue for a onetime recognise, (d) shifting menstruum expenses to a afterward period, (e) failing to recognize or utter some liabilities, (f) shifting current revenue to a later period, and (g) shifting future expenses to the current period. Practices (a) through (e) have the impression of inflating current period income, while practices (f) and (g) have the effect of trim down current period income.

Examples of the Misapplication of Revenue and Expense mention Requirements

In 1987, profits at Stone & Webster Engineering Corp. were $3.28 per share. everyplace the following three years, however, profits deteriorated to the point where they reached a low of $0.50 per share in 1990. In 1991, however, a turnaround appeared to foreshorten place. Revenues increased to $273.2 jillion in 1991 from $262 million in 1990, and dismiss profit per share increased from 1990's $0.50 to $1.08 in 1991. In the first absorb of 1992, the rebound appeared to continue, when earning per share in the first quarter of 1992 were $0.22 compared to $0.10 in the first quarter of 1991, and first quarter revenues in 1992 were $66.9 million compared to ju

Arnaut, Gordon. "IBM Into the Red For the First Time." selective information Canada, 17 (February 1992): 1, 46.

The explanation was that the $0.53 per share earnings do good was entirely the result of an accounting change. The accounting change was think to the company's funding of employee pension benefits. In 1991, Stone & Webster Engineering Corp. began recognizing income on investments dedicated to the funding of employee retirement benefits. This investment income accounted for 52 percentage of the company's 1991 earnings per share, and more than 100 percent of the company's reported gain in earnings per share.

The accounting change was the result of respectfulness with a federal directive requiring that companies recognize the funding for the placement retirement health benefits of employees. Such future health benefits are those companies are required to provide to present employees based on service already completed with those companies. The recognition of this funding compulsion does not take additional money away from a company. Rather, the requirement caused the money to be stated as a future liability, as opposed to being classified as retained earnings. This recognition of expense did, however, illustrate that the company had been misstating its income in prior years.

In 1992, IBM reported the first annual hurt in the company's history; the loss was for 1991. The company reported a net loss for 1991 of $2.8 billion. IBM blamed the loss on the oecumenical recession and on intense competition in the computing machine industry. Revenues dropped to $64.8 billion in 1991 from $69 billion in 1990, and net earnings in 1990 0f $6 billion dropped to the $2.8 billion loss in 1991.

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