Intermediate Accounting, 15th Edition

CHAPTER 18 Revenue Recognition

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1. Describe and apply the revenue recognition principle.
2. Describe accounting issues for revenue recognition at point of sale.
3. Apply the percentage-of-completion method for long-term contracts.
4. Apply the completed-contract method for long-term contracts.
5. Identify the proper accounting for losses on long-term contracts.
6. Describe the installment-sales method of accounting.
7. Explain the cost-recovery method of accounting.

It's Back

Several years after passage, the accounting world continues to be preoccupied with the Sarbanes-Oxley Act of 2002 (SOX). Unfortunately, SOX did not solve one of the classic accounting issues—how to properly account for revenue. In fact, revenue recognition practices are the most prevalent reasons for accounting restatements. A number of the revenue recognition issues relate to possible fraudulent behavior by company executives and employees.

As a result of such revenue recognition problems, the SEC has increased its enforcement actions in this area. In some of these cases, companies made significant adjustments to previously issued financial statements. As Lynn Turner, a former chief accountant of the SEC, indicated, “When people cross over the boundaries of legitimate reporting, the Commission will take appropriate action to ensure the fairness and integrity that investors need and depend on every day.”

Consider some SEC actions:

• The SEC charged the former ...