Justin D. Bost
September 23, 2009
Chapter 5
Case 5-5 Revenue Recognition
a. The point of sale is generally used as the basis for the timing of revenue
recognition because recognition is the formal acknowledgement of a
transaction or event. Realization is the converting non-cash or claims to cash.
b. Objections to sales basis of revenue recognition:
i. Too conservative because many companies need to recognize
revenue continuously throughout long term transactions, such
as major construction, and not having more than one way to do
that can be detrimental to the company’s financial position at
any given time.
ii. Not conservative enough do to the conservatism principle. If
there is more than one way to show revenue then it should be
done in the way that is less likely to overstate revenue.
c. (1) During production because can be beneficial for companies in construction
for example. If the company has a project that takes say four years, they could
recognize a quarter of the revenue each year or as the work is completed. This
could give the user a more reliable view of the company’s current position. (2)
When cash is received can work for a service business for example. Services
often rely heavily on the satisfaction after the service is complete and could be
affected in many ways before payment is actually made.
Case 5-8
a. Conservatism holds that when you are in doubt; choose the accounting
alternative that will be least likely to overstate assets or income (p.155
in text).
b. I believe it has taken away a lot of choices for the preparers of
financial statements. At the same time it also instill much more
confidence in the users knowing that, despite earnings management,
there is some assurance that assets or income is not overstated.
c. I believe that financial statements that recognize losses but not gains
can not, in general, provide information that is relevant and
representationally faithful. If a loss is material enough for the user to
know about than I believe that a similar gain would be as well.