ADMS3585W09_Ch6 slides - with homework

ADMS3585W09_Ch6 slides - with homework - CHAPTER 6...

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C H A P T E R 6 Revenue Recognition
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Chapter Overview A very hard chapter What have been examined in class are  conceptual guidelines. Real world  revenue recognition requires a great  deal of professional judgment and  involve many accounting estimates and  trade-off between relevance and  reliability
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Revenue Recognition  Probably the most difficult single issue in  accounting – complex modern business  activities makes the issue challenging A relatively small change in revenue recognition  can have a major impact on net income Many times is an area where firms use  questionable and sometimes improper  accounting procedures Private firms often have tax minimization as objective,  while public firms often have profit maximization as  objective Not acceptable, either ethically or under  GAAP With deliberate attempts to mislead users
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Lucent Fraud http://www.sec.gov/news/press/2004-67.ht
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Company Background Was spun off from AT&T on September  30, 1996 At the time, largest IPO Nation’s most widely held stock in Dec.  1999 Maintained reputation as a growth  company CEO pushed 20% sales growth Sold software and hardware to phone  companies and network operators
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A Brief on the Scandal 1997-1999   net income increases 1997-1999   cash flow from operations decreases Jan 6, 2000 : Lucent announced that earnings  falling 20% short of expectations Late 2000 : Lucent announced that there was an  accounting irregularity of $125 million revenues in  its 4 th  fiscal quarter ended on Sep 30, 2000.   May 17, 2004 : SEC charged Lucent with securities  fraud and violations of GAAP. Penalty was set at 25  million. Ten individuals were charged.
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$449 $1, 000 $3, 500 $2, 100 $1, 900 ( $276) ( US$500) US$0 US$500 US$1, 000 US$1, 500 US$2, 000 US$2, 500 US$3, 000 US$3, 500 US$4, 000 1997 1998 1999 Mi l l i ons Net I ncome Cash Fl ow f rom Operat i on
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Real-World  Revenue Recognition Issues Cash sales Sales on account (Credit sales) Consignment sales Sales contract on long-term constructions Sales with rights of return Sales when collectibility is uncertain Swap of two non-monetary assets And many more… Sell computer software with staff training and free  upgrades Sales with “no payment, no interest in 36 months”
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More Cautions… EARNINGS  (soft number, including accruals)  are not  CASH FLOWS  (hard number) RECOGNITION  (to record the transaction)  differs from  REALIZATION  (to have cash) Measurement of revenues based on current  techniques is  FAR FROM PRECISE Revenue recognition is a  CASE BY CASE   approach. Look at  The objectives of accounting, and The criteria for revenue recognition, and The facts of the situation unique to the unit
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This note was uploaded on 04/27/2010 for the course ADMS 3585 taught by Professor Sandra during the Spring '10 term at York University.

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ADMS3585W09_Ch6 slides - with homework - CHAPTER 6...

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