Accrual Accounting Issues

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Accrual Accounting Issues Implementation

• Chapter-4

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Learning Objective-1

• The student should be able to explain the revenue
  recognition and matching principles and how they
  improve the measurement of Net Income

Take a look at Chapter 4 Concepts to Master
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Background at Beginning of Chapter

• Grocer shows up in America with pair of pants,
  has successful life but daughter challenges his
  cigar box accounting
• Key point-Periodicity Assumption-forces us to
  measure activities before they are completed

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Forcing the periodicity assumption leads to
uncertainty and possible unethical responses

• Worldcom Story

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Revenue Recognition Principle

• Revenue can be recognized iff
• Substantially delivered goods or performed
  service
• Customer has ability to pay
• Customer has intent to pay

Separation of Cash Receipt from Revenue
Recognition
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Ways to Manipulate Revenue Recognition

• 35 day month
• Parking transactions
• Multiyear licensing payments recorded upfront as
  revenue
• Sunbeam channel stuffing

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Matching Principle

• Expenses follow revenue
• Translation All expenses incurred in earning
  revenue should be reported in the period in which
  the related revenue is recognized

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Management Insight Example

• Lucas invests 11 million in creating Starwars
• 1977
• 1997
• New forms of distribution ot likely imagined by
  Lucas
• 500 million in revenues
• How should that original 11 million be expensed?

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Solution Accrual Accounting

• Accruals Journal entries that allow the
  recognition of revenues and expenses before the
  cash is paid or received
• Deferrals/Prepayments Journal entries that allow
  the delay of the recognition of revenues and
  expenses until sometime after the cash is paid or
  received

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What Accrual Accounting Does for us

• Provides a way to recognize the receipt or
  payment of cash ? improves stewardship
• Provides a way to recognize revenues and expenses
  before cash is paid or received
• And maybe just makes our lives a little more
  complicated

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