Module 3 Income Statement

Module 3 - Case

Why is revenue recognition a significant issue? How do we determine when revenues are recorded for accounting purposes?

Revenue recognition is one the most important concept when preparing the financial statement for the corporations. Many corporate around the global find it very difficult to apply this concept especially in the case of tech base companies because of the complexity in revenue recognition concept. We can find many example of revenue recognition issue especially in E-Commerce side. For example ebay.com include the entire price of the auctioned items into its revenue figure, even though it had no ownership or credit risk for items auctioned through its website; same is the case for priceline.com, Which is an online broker, sell airline tickets and records the full price of the ticket as its revenue, due to which company's revenue are inflated as compared to the traditional broker which charges a commission as its revenue. The simplest definition for revenue recognition is that the revenue should be recognized when it is earned. This concept is very important for accrual accounting together with the matching principle. General rule for revenue recognition concept is that advances payment form customers is not recognized as revenue and treated like liabilities, unless the goods/services are exchange/rendered.

Explain the difference between a product and period expense?

From an accounting perspective, the product cost includes all the costs from acquiring to making of the product. Normally it includes direct material, direct labor and manufacturing overheads. Initially product cost is treated as inventory and listed on the balance sheet under the heading of current asset; as soon as a sale is generated this figure is transferred from the balance sheet to the income statement under the heading of cost of sales. As product cost was initially treated as inventory on the balance sheet, that why it is also known as inventoriable costs. Period cost is that cost, which is not involved in the manufacturing of that particular good. Most common examples of the Period cost are commission, selling and administrative, office rent and other. Period cost is found on the income statement under the heading of the expenses.

Discuss the matching concept as it relates to accounting for revenues and inventory.

Like revenue recognition, matching principal is an important concept in accrual accounting. According to the matching principle all the expenses should match with the revenue earned at the particular period of time. For example, prepayment of any expense is not treated as a current expense for that calendar/fiscal year; it will be treated as current assets on the balance sheet. As soon as that prepaid expense is used to generate revenue, then it will recognize as an expense in the income statement. In addition to this LIFO (Last-In First-Out) Method is justified based upon the matching principle, as the most recent cost of inventory is matched against the current revenue generated from the sale of that inventory.

What accounting conventions do the two companies follow ...