Lucent Technologies-Revenue Recognition Case

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a) -Revenues are inflows of assets or settlements of liabilities or both. Revenues come from activities of the entity’s central operations. -Gains are increases in net assets and from peripheral or incidental transactions of an entity. -The difference between gains and revenues depend to a great extent on the typical activities of a company. For example, when McDonald’s sells a hamburger, it records the selling price as revenue. However, when Mc Donald’s sells land, it records any excess of the selling price over book value as a gain. b) -In cash basis accounting, revenues are simply recognized when cashed is received no matter when and how the services were performed or goods delivered. -In accrual basis accounting, revenues are recognized when they are realized/ realizable or earned in cases of: +Persuasive evidence of an arrangement exists

+Delivery has occurred or services have been rendered
+The seller's price to the buyer is fixed or determinable
+Collectibles is reasonably assured.
-Revenues are not recognized at the time of sale, but shall be recognized either when the return privilege has substantially expired or when the above conditions are not met. -Accounts are affected by the process of revenue recognition: cash, account receivable, revenue, and unearned revenue. c) Lucent recognized revenue when persuasive evidence of an agreement exists, delivery has occurred, the fee is fixed and determinable, and collection of the resulting receivable, including receivables of customers to which Lucent has provided customers financing, is probable. For sales generated from long-term contacts, primarily those related to customized network solutions and network build-outs, Lucent generally uses the percentage of completion method of accounting. After the incident that SEC forced Lucent to restate the its financial results leading its stock price to decline 8.5% in 2000, Lucent now records the sales revenue when the customers buy the equipment,...
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