Generally Accepted Accounting Principles and Revenue Recognition

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Revenue Recognition:
Case Study on
Caltron Computers, Inc.
Julie Mong
April 17 , 2010

1. In general, evaluate Caltron's revenue recognition policy and the quality of Caltron's earnings.

Caltron Computers, Inc., a computer hardware company, is publicly held with market capitalization amounting to over $450 million. Carlton’s system designs enable their mini-computer systems to measure up to the power of mainframes with small cost outlays.

The accounting practices at Carlton normally permit revenue recognition after the shipment of the computer systems. Peale, Gower and Quill, Carlton’s auditors, are worried about the accounting practices regarding revenue recognition of certain transactions during the last quarter of 20X1. They are also worried about the adverse effects of such accounting on the company’s quality of earnings and thereby on its planned public stock offering in February 20X2.

The present US GAAP (Generally Accepted Accounting Principles) revenue recognition model comprises over 100 standards and interpretations, many industry specific and inconsistent (PwC, 2010). Yet, the fundamental revenue recognition standards lead to the conclusion that Caltron’s accounting practices adversely impact the quality of its earnings and accounting statements. 2. Discuss how and why Peale, Gower & Quill should recommend that Caltron account for and report the four transactions in the fourth quarter of 20X1. Include in your discussion specific reference to bill and hold arrangements and accounting pronouncements that you used to formulate the basis of your recommendation.

The customers’ rights to return goods are considered to be types of customer acceptance provisions. These provisions permit customers to return goods or cancel agreements if their performance is not satisfactory. These provisions could also entail product assessments on a trial basis. Revenue recognition under the well recognized ‘SEC...
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