Over the past ten years the importance of accounting cannot be overemphasized, as we've seen our share of national scandals. In today's society accounting principles and standards are severely important in driving the formation of financial statements. Without principles and standards, financial reporting would not fairly present the financial position of a company. Accounting has changed and evolved vastly over time and continues to change. Because of this I am going to breakdown the way your financial reporting team has been recognizing revenue for the fourth quarter of the current year and assess the implications it may have on your financial statements. I will also take you through the process of how the accounting standards are created to give you a better understanding of what my conclusion is.
Revenue Recognition Implications
As you know Caltron Computers, Inc. is a publicly held company with a total market capitalization in excess of $450 million, and you have a proposed secondary public stock offering coming in early February 20X2. Therefore the auditors are concerned about the impact of these transactions and want to bring it to your attention before it misrepresents the reported earnings.
Caltron reported net revenues from four transactions equal to $1,710,000 in Q4, while cash received only totaled $495,000. The quality of earnings issue surfaces and gives the auditors reasons to question the accounting methods and possibly their honesty and ethics. The company policy for recognizing revenue is when the products are shipped, and because of this, a potential issue has come about relating to some of the transactions.
Typically revenues are earned when the earning process is complete and an exchange has taken place. Once this happens the risks of ownership are transferred to the buyer, unless an arrangement for the sale states otherwise. Collectibility of the sales price is questionable for three of these transactions. According to FASB,...
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