Revenue Recognition
Introduction and Purpose of Assignment
The timing of recognizing revenue can affect a companys income especially at the end or beginning of a period therefore it is important to properly record revenue.
Objectives
Upon completion of this assignment you should be able to determine the proper timing of revenue recognition and the possibilities for its abuse. (2.2)
Theory and Context
Because revenue often has the greatest effect on the income statement properly recognizing revenue plays a pivotal role in determining a companys profitability. Determining when revenue can be recognized is carefully governed by FASB and therefore accountants must pay special attention to those guidelines.
Instructions
The Precision Parts Corporation manufactures automobile parts. The company has reported a profit every year since the companys inception in 1980. Management prides itself on this accomplishment and believes one important contributing factor is the companys incentive plan that rewards top management a bonus equal to a percentage of operating income if the operating income goal for the year is achieved. However 2016 has been a tough year and prospects for attaining the income goal for the year are bleak. Tony Smith the companys chief financial officer has determined a way to increase December sales by an amount sufficient to boost operating income over the goal for the year and earn bonuses for all top management. A reputable customer ordered $120000 of parts to be shipped on January 15 2017. Tony told the rest of top management I know we can get that order ready by December 31 even though it will require some production line overtime. We can then just leave the order on the loading dock until shipment. I see nothing wrong with recognizing the sale in 2016 since the parts will have been manufactured and we do have a firm order from a reputable customer. The companys normal procedure is to ship goods f.o.b. destination and to recognize sales revenue when the customer receives the parts.
Must be in APA format with 200-300 words