Real World Case 5-1
A bill and hold strategy accelerates the recognition of revenue. In this case, sales that would normally have occurred in 1998 were recorded in 1997. Assuming a positive gross profit on these sales, earnings in 1997 is inflated. Requirement 2
A customer would probably not be expected to pay for goods purchased using this bill and hold strategy until the goods were actually received. Receivables would therefore increase. Requirement 3
Sales that would normally have been recorded in 1998 were recorded in 1997. This bill and hold strategy shifted sales revenue and therefore earnings from 1998 to 1997. Requirement 4
Earnings quality refers to the ability of reported earnings (income) to predict a company’s future earnings. Sunbeam’s earnings management strategy produced a 1997 earnings figure that was not indicative of the company’s future profit-generating ability.
Judgment Case 5-2
While revenue often is earned during a period of time, revenue usually is recognized at a point in time when both revenue recognition criteria are satisfied. These criteria usually are satisfied at the point of delivery. The revenue has been earned and there is reasonable certainty as to the collectibility of the asset (cash) to be received. Usually, significant uncertainties exist at the time products are produced. At point of delivery, the product has been sold and the price and buyer are known. The only remaining uncertainty involves the ultimate cash collection, which can usually be accounted for by estimating and recording allowances for possible return of the product and for uncollectibility of the cash. Requirement 2
It would be useful to recognize revenue as the productive activity takes place when the earnings process occurs over long periods of time. A good example is long-term projects in the construction industry. Requirement 3
Some revenue-producing activities call for revenue recognition...