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Earnings Management & Revenue Recognition

Is earnings management always intended to produce higher income? Explain

Explain and justify why revenue often is recognized as earned at point of delivery.

Explain in what situations it would be useful to recognize revenue as the productive activity takes place.

At what times, other than those included in the above answers, may it be appropriate to recognize revenue?

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Earnings Management & Revenue Recognition
Is earnings management always intended to produce higher income? Explain.
No, earnings management can be shifting income up or down to achieve a particular earnings goal. If you want to hit your quarterly budget and the quarter is better than expected, you might increase a reserve (allowance for doubtful account, warranty reserves, allowance for sales returns) to remove the excess earnings and "save" it for another quarter when you are short. There have been fraud cases (although less common) where they reported too little earnings rather than too much and this was found to be misleading to investors - failing to report a reasonable picture of operations.

Explain and justify why revenue often is ...

Solution Summary

I have given you guidance on why earnings management can increase or decrease earnings, why delivery is a common trigger point for recognizing revenue, and discussed expectations when you recognize revenue at points other than delivery. Your response is 279 words in everyday language suitable for a novice to intermediate.

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