The first value in the profit equation is revenue or sales. This number represents the financial value for the products and services you’ve sold. It is from this number that costs are subtracted to calculate profit. The challenge with revenue recognition is that there does not have to be alignment between when you sell something, when you recognize the revenue (I will be paid), and when you receive cash (I have been paid) (Exhibit 4.1). The most common such situation is one where you sell an item and recognize revenue without receiving payment. This is regularly the case for companies that sell items with payment terms—“pay us in 30 or 60 days.” In these cases, if you sell something in December and recognize the ...
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