The timing of recognizing revenue can affect a company’s income especially at the end or beginning of a period, therefore it is important to properly record revenue.
Upon completion of this assignment you should be able to determine the proper timing of revenue recognition and the possibilities for its abuse. (2.2)
Theory and Context
Because revenue often has the greatest effect on the income statement, properly recognizing revenue plays a pivotal role in determining a company’s profitability. Determining when revenue can be recognized is carefully governed by FASB and therefore accountants must pay special attention to those guidelines.
- Review the concept of revenue recognition.
- Read the Ethical Dilemma regarding Precision Parts Corporation:
The Precision Parts Corporation manufactures automobile parts. The company has reported a profit every year since the company’s inception in 1980. Management prides itself on this accomplishment and believes one important contributing factor is the company’s incentive plan that rewards top management a bonus equal to a percentage of operating income if the operating income goal for the year is achieved. However, 2016 has been a tough year, and prospects for attaining the income goal for the year are bleak. Tony Smith, the company’s chief financial officer, has determined a way to increase December sales by an amount sufficient to boost operating income over the goal for the year and earn bonuses for all top management. A reputable customer ordered $120,000 of parts to be shipped on January 15, 2017. Tony told the rest of top management “I know we can get that order ready by December 31 even though it will require some production line overtime. We can then just leave the order on the loading dock until shipment. I see nothing wrong with recognizing the sale in 2016, since the parts will have been manufactured and we do have a firm order from a reputable customer.” The company’s normal procedure is to ship goods f.o.b. destination and to recognize sales revenue when the customer receives the parts.
- What are the possible negative ramifications of this plan?
- Is it ethical to recognize the revenue early in this plan? Why or why not?
- Use biblical principles to support your position.
Must be in APA format with 200-300 words