ETHICAL DECISION MAKING LO 2,3,4,5 DECISION CASE 4-5 REVENUE RECOGNITION AND THE MATCHING PRINCIPLE

CHAPTER 4 INCOME MEASUREMENT AND ACCRUAL ACCOUNTING 4-51 DECISION CASE 4-5 (Concluded) 2. The first suggestion, to delay recording the 4% commission expense until July, is a clear violation of the matching principle. Regardless of when the sales staff is paid commissions, it is wrong to record the revenues in June but not record the expense associated with earning that revenue—i.e., commissions—until July. Likewise, de- ferring the recognition of the advertising bill as an expense until July also violates the matching principle. Under the matching principle, this cost should be recognized as an expense in the period in which it provides benefits (in this case, the month of June), regardless of when cash is paid. Finally, the change in estimated useful life for the automobiles is also questionable from an accounting point of view. Compa- nies are allowed under generally accepted accounting principles to change estimat- ed useful lives of depreciable assets, but the changes must be justified on sound economic grounds. For example, changes in technology might prompt a company to decrease the estimated useful lives of its computers. The need to increase the net income for the year is certainly not an acceptable reason under GAAP to change the estimated useful lives of depreciable assets. The changes suggested result in financial statements that do not faithfully represent what they claim to represent and are not merely minor bookkeeping changes. Read- ers assume that the statements are prepared on an accrual basis rather than a cash basis. Also, they assume that the company is consistent in the way it depreci- ates assets from one period to the next.