What assumptions underlie Oracle’s recognition of revenue for license fee. Are these assumptions reasonable given the firm’s business and operating policies? Oracle recognized its license fee either upon shipment of the product or at the time such agreements are effective. In most instance is this the date of the agreement. The assumptions underlying this method is that if the customer is creditworthy and the terms of the agreement are such that the amounts are due within one year and are non-refundable and the agreements are no cancellable. This assumptions are reasonable given the firm’s business because most buyers buy the products on a tailored basis and giving that the contract aren’t cancellable and non-refundable Oracle has a reasonable basis to assume that the receivable is collectable.
Estimate Oracle’s 1990 sales if revenue is recognized at delivery rather than when the contract is signed. Sales recognized at contract date with 160 days receivable. $689.898/160= $4.311,86
Sales when recognized at delivery: $4.311,86*120=$517.423,5
If the firm’s 1990 cost of sales ratio and average tax rate are unaffected by a change to the more conservative revenue recognition method, what would be the affect of this accounting change on the company’s 1990 net income?
Use the 1990 cost of sales to sales ratio and the average tax rate to estimate the size of the opening retained earnings write-off required if Oracle decides to adopt the new revenue recognition method retroactively. The profit is $37.282 lower than before adopting the new revenue recognition method. Therefore the retained earnings are: $267.475-$37.282= $230.193
How would a change in revenue recognition affect the firm’s lending contracts and management compensation? There credit rate will be improved due to less risk and higher liquidity. The firm is required to maintain certain financial ratios under the line of credit agreements. The firm will more promptly in...
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