Kendall Square Research Company

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Kendall Square Research Corporation is a technology company that has recently been scrutinized for its liberal revenue recognition policies. Currently this company recognizes revenue on product sales upon written acceptance of the product. However, acceptance typically occurs prior to the configuration of a particular system being finalized or payment being received from the customer. According to the Generally Accepted Accounting Principles (GAAP), revenue should be recognized when a transaction occurs and 1) the revenue is realized or realizable and 2) the revenue is earned. Revenue is generally considered realized when cash is received for a product or service and realizable when a promise to pay is made (i.e. accounts receivable or notes payable). There are also issues with a customer’s ability to pay along with the timeliness of that payment. Several critics even believe that the only real way to determine revenues is through the matching of cash receipts to their corresponding expenses. Kendall Square Research has veered away from several of these revenue recognition accounting principles. The first example of this is the company’s definition of a sale. There were cases where laboratories had ordered or received equipment from Kendall for which there was no prospective funding. Of the cases where funds were granted, the terms for payment were typically six to nine months, this being after the government grant was awarded. Such slow payments were not unusual. Most contracts had the option to cancel as well. Another concern dealt with customers who purchased fewer processors than were eventually thought to be needed. In these cases KSR would send additional processors for installation and use by the customer. Although the company would only book revenue and accounts receivable for the processors actually requested, they would keep the additional processor sent on their books as inventory until the customer decided to buy them. As a result of these...
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