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Impact on net income

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Company X is a software company that currently recognizes revenue when the agreement/contract is signed. Company X is considering a more conservative approach by recognizing revenue at the deliver of the product to customer. Therefore, it's considering changing its revenue recognition policy.

Days in receivable under current recognition policy (contract): 160
Days in receivable under new recognition policy (deliver): 120

Use the sales and marketing cost as cost of sales.

If the firm's 1990 cost of sales to 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?

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Solution Preview

The sales in 1990 are $970,844.
Currently the revenue is accounted for on contract. Under the new policy the revenue would be accounted for on delivery.
Receivable days under current policy are 160 and receivable days under new policy would be 120. This implies that delivery happens after 40 ...

Solution Summary

The solution explains how to estimate the impact on net income of an accounting change