Explore BrainMass

The Revenue Recognition Principle

Recognition is the process of formally incorporating an item into the financial statements of an entity. Earnings is the most important item presented on the financial statements, and is determined from the revenues and expenses recognized in the period. The revenue recognition period tells us which period we should recognize revenue in. Together, the revenue recognition principle and the matching principle, which tells us what period expenses should be recognized in, are used to determine a company's earnings. The revenue recognition principle only applies to accrual-basis accounting

The criteria, conventions and rules for recognition require that revenues are to be recognized when they are both realized, or realizable as well as earned.1 According to the SEC, this usually does not occur until four conditions are met:

     1. The price is fixed or determinable
     2. There is persuasive evidence that an arrangement exists
. Collection can be reasonably assured 
     4. Substantial performance has been completed.2

1. The price is fixed or determinable:

A fixed price is one that has been established and not subject to change or variation. A determinable price is the price that the buyer and seller are capable of settling or deciding on - for example, the market price of readily realizable assets such as marektable securities, precious medals or some agricultural products.3 An arrangement that includes a customer cancellation clause might indicate that the sale isn't final, or is merely part of a demonstration period. Revenue from a contract isn't fixed or determinable until the cancellation priveleges elapse. Short-term rights-of-return for products are not cancellation clauses, and can be recognized if returns can be reasonably estimated. 

2. There is persuasive evidence that an arrangement exists:

Sales can't be recognized until the terms of a business deal or contract are agreed upon and finalized. Evidence may be in the form of a written sales agreement or written or electronic evidence such as a purchase order or online authorization. 

3. Collection can be reasonably assured:

Collection can be reasonably assured refers to realized or realizable revenues. Revenues are realized when goods or services are exchanged for cash or claims to cash. Revenues are realizable if the assets received or held can be readily converted into cash or claims to cash. Assets are readily convertible if they can be sold or interchanged in an active market at prices that are readily determinable and there is no significant additional cost. 

4. Substantial performance has been completed:

Substantial performance typically means that, when the earnings process is discrete, the service has been provided or the goods have been delivered and the risks and rewards of ownership must have transferred to the buyer. If the earnings process is continuous, and has more than one significant event, revenue recognition becomes more difficult. In many cases, revenue is is recognized over time, as is the case with long term construction projects. 


1. FASB ASC 605-10-25-1
2. FASB ASC 605-10-S25
3. FASB CON5 par 84-d

Make-or-Buy Decision

Make or buy Yoklic Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials $ 4.00 Direct labor 30.00 Variable overhead 15.00 Fixed overhead 25.00 Total $74.00 Regina Corp has contacted Yoklic with an offer to sell it 5,000 subassemblies for $55.00 each.

Recognizing Licensing Fee Revenue

Scenario: You work as a staff accountant for Kidz Express, a publicly traded movie production company. Kidz Express is set to release "Dancing with Elephants" toward the beginning of next period. To promote the movie, Kidz Express will have promotional toys in children's meals sold by national fast food chain, Bugers 'n Dogs.

Analyzing Singapore Airlines Case Studies

After reading the "Singapore Airlines (A) and (B)" (Harvard Business School case, no. 9-687-022 & 9-687-023), address the following: 1) Singapore Airlines (SIA) states that cabin crews are a vital component of its service strategy. Evaluate the elements of SIA's workforce management program (young crew policy, training progra

External Analysis of the Motorcycle Industry

Like other companies, HD operates in a complex global industry. In order to develop and execute a successful strategy, the HD Motorcycle Corporation must take into account the global automotive environment. In this case assignment you are going to be asked to discuss HD from a strategic perspective. Please read the informatio

Cisco Case Study

How is building a brand in a business-to-business context different from doing so in the consumer market? Is Cisco's plan to reach out to consumers a viable one? Please see the attached case study.

Red Flags in Assessing Earnings Quality

One step in assessing the quality of earnings is to look for red flags. An example of a red flag is a change in auditors. A parting of the ways with auditors may be because of disagreements over accounting matters. This will be filed in an 8-K report. List five other red flags the astute analyst might look for, describe why it i

Reporting Fraud

An accounting professor, Dr. Mitchell, received a telephone call early one Monday morning from a former accounting student who wished to remain anonymous. The caller was serving as a controller of a small start-up company that, in the caller's opinion, knowingly submitted fraudulently misstated financial statements to its local

The Point Athletic Club

The Point Athletic Club offers one-year memberships. Membership fees are due in full at the beginning of the individual membership period. As an incentive to new customers, The Point advertised that any customers not satisfied for any reason could receive a refund of the remaining portion of unused membership fees. As a result o

Lake Power Sports sells jet skis and other powered recreational equipment.

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment meth

Business to Business Buying Behavior

Business-to-Business Buying Behavior I am the sales manager for a hair and facial cosmetics distributor in the Midwest and have a staff of 120 sales representatives calling on literally thousands of hairstyle retail shops. The former sales manager had segmented the sales territory into two six-state geographical regions as fo

A detailed writing regarding the history of Netflix.

Please answer the following questions about Netflix. Provide at least 300 provides and include references in the solution. Discuss the company history, when it was founded, by whom, and list other historical facts. Who is the audit firm for the company? What stock exchange is the company listed on. what is their ticker

Special order managers decision options

Special Order The Cone Head House sells ice cream cones in a variety of flavors. Data for a recent week appear here: Revenue (1,000 cones @ $1.50 each) $1,500 Cost of ingredients 530 Rent 300 Store attendant 600 Income $ 70 The Cone Heads manager received a call from a university student club request

The Sherwin Williams Company

The Sherwin-Williams Company (Sherwin-Williams; ticker symbol SHW) was founded in 1866. The company develops, manufactures, distributes and sells paints, coatings, and related products to professional, industrial, commercial and retail customers. The Company is organized into three segments - Paint Stores Group, Consumer Group a

Layaway big screen television from Warren and Willey Furnishing

20. Gary Miller recently purchased on layaway a big screen television from Warren and Willey Home Furnishings. Warren and Willey is a public company. Gary paid $100 as a cash deposit on the television. The television cost Warren and Willey $2,500 and has a total retail price of $3,000. Warren and Willey has set the television a

Delivers twenty truckloads of sand to Gravel Company

18. Sand Company, a publicly traded company, delivers twenty truckloads of sand to Gravel Company prior to December 31, 2011, the end of Sand's fiscal year. Sand normally enters into a written sales agreement with customers similar to Gravel Company. The written sales agreement must be signed by both companies in order to be b

CRM for 21st Century

You are a marketing consultant (as before). You get a call from the president of a medium size service firm. (Choose your industry and/or company.) The VP of marketing has rebelled. The VP says: "This CRM is nonsense. We have loyalty programs and we're polite. We even give adjustments most of the time "But this is 2009. Cust

Quality and Service Systems

1. Discuss possible ways to improve service quality in a custodial janitorial company specializing in contract maintenance of office space. 2. Describe potential strategies for reducing staffing problems and high turnover in the janitorial company when there is clear inequity in crew leader's attitudes and performance expecta

Company performance review

Harvard Business Case: 9-100-022 June 18, 2001 David F. Hawkins Seitel, Inc. Decide on company's operational/financial strategy - what reporting tools to use and assess the financial figures.

Definition of Integrity in Accounting

Integrity Discussion The American Heritage Dictionary defines integrity as "a rigid adherence to a code or standard of values; a state of being unimpaired; soundness; the quality or condition of being whole or undivided." One acquires integrity through a variety of sources. In your discussion of the topic, discuss what i

Incentives and Reward Systems

In the Magic Grafix simulation, you saw a number of possible alternatives for rewarding employees in different groups. They included the following: Individual incentives Gain sharing Profit sharing Lump sum merit awards Spot bonuses Group incentives What were the "best" choices for each of the three business grou

The Relationship Between Measurement and Recognition

Read the Frantek, Inc. case and respond to the following: a. Analyze the relationship between measurement and recognition. b. Explain recognition criteria in the context of this case. Case: Revenue Recognition, Inventory Valuation, and Liability Recognition Issues Frantek, Inc. is a manufacturer of microcomputer parts

Recognition of Profits on long term contracts

I am studying for a test that will have the following type of problems listed. I would like to use these as examples to follow in the course book. I pulled up similar topics on the internet but it does not apply to academics 4. (Recognition of Profit on Long-Term Contracts) During 2004 Pierson Company started a constru