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Why is revenue recognition a significant issue?

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Part I.
- Why is revenue recognition a significant issue? How do we determine when revenues are recorded for accounting purposes?
- Explain the difference between a product and period expense.
- Discuss the matching concept as it relates to accounting for revenues and inventory.

Part II. Refer to the latest annual financial statements for the two following companies: Apple and Philips. Generally, this information is found in the Investor Relations area of the website.
Clearly identify the companies, the time period, and include the link to the financial statements you are analyzing in your report.
- What accounting conventions do the two companies follow, US GAAP or IFRS?
- What about auditing standards for the two companies?
- Locate the income statement for the past two years for both companies. Prepare a table comparing five items or more from each statement.
- Comment on the changes from one year to another. Is the company doing better or worse? Did revenues and expenses increase or decrease?
- Is it easy to discern trends or compare the information from year to year and between the two companies? Please, comments on both aspects and show some examples.

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Solution Summary

Your tutorial is 729 words plus exhibit in Excel. The discussion explains why revenue recognition is not cut and dry all the time and how product and period costs differ. Apple and Philips 2011 Income Statement are shown (photo in Excel) and discussed. Links to their annual report is provided.

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Revenue recognition accounts for 70% of fraudulent reporting. Why? It significantly changes the profit result, and has a number of potential variables impacting when they are recorded. We record revenue when it is "earned" but deciding when it is "earned" is not always cut and dry. For instance, when Microsoft sells their Office 2007 version and it includes one-year free customer service and three-years of upgrades and service pack fix files, how much of the revenue from the software sale pertains to the software code (fully delivered) and what part pertains to the future (undelivered and unknown at the time of sale) files? They have to allocate sales revenue between the multiple elements of the product. This is fussy and hard to do.

A product cost is a cost that is required to obtain or create the product. A period cost is one that is used up during the ...

Solution provided by:
Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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