Chapter 2Aggressive Revenue Recognition


Take It from the Top

Revenue is the top line of the income statement for a reason: It is the lifeblood of any company. Investors scrutinize trends in revenue growth to assess the strength of a company’s performance. But despite revenue’s crucial importance, they don’t question it nearly as much as other income statement items, such as earnings per share. The conventional wisdom is that revenue is harder to manipulate than EPS, leading some to include price/sales ratios in their analysis. Yet there are many ways management can mask a slowdown by manipulating the top line.

Any investor with a few years’ experience reading financial statements and a willingness to work can detect revenue manipulation. Yet ...

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