Lecture07 - Lecture 7 Timing of Revenue Recognition 1 Admin...

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1 Lecture 7 Timing of Revenue Recognition
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2 Admin Stuff • Homework #3 due now • Homework #4 due next Thursday
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3 Review • Net income or earnings can come from cash transactions or accruals – Management has some discretion over the recording of accruals – Does “the market” fully understand this fact? • What incentives does management have to overstate or understate revenues, expenses, and thus, income? – What have we learned from academic research?
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4 Goals of Today’s Class • Revenue recognition for a company that builds things and takes a long time – Construction companies – Production of large-scale products – Engineering firms – Defense contractors
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5 Accounting for Sales Revenue The revenue principle requires that revenues be recorded when earned: An exchange has taken place. An exchange has taken place. Collection is probable. Collection is probable. The earnings process is nearly complete. The earnings process is nearly complete.
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6 What if production takes much longer? • Long-term contractors – Production spans multiple accounting cycles • Percentage of Completion Method – Using this method, revenue is recognized
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Lecture07 - Lecture 7 Timing of Revenue Recognition 1 Admin...

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