Chapter 5 - Income measurement and profitability analysis. The focus of this chapter is revenue recognition. We also continue our discussion of financial statement analysis. Discuss the general objective of the timing of revenue recognition, list the two general criteria that must be satisfied before revenue can be recognized, and explain why these criteria usually are satisfied at a specific point in time. | Income Measurement and Profitability Analysis 5 Chapter 5: Income Measurement and Profitability Analysis Learning Objectives Discuss the general objective of the timing of revenue recognition, list the two general criteria that must be satisfied before revenue can be recognized, and explain why these criteria usually are satisfied at a specific point in time. LO1 Our first learning objective in Chapter 5 is to discuss the general objective of the timing of revenue recognition, list the two general criteria that must be satisfied before revenue can be recognized, and explain why these criteria usually are satisfied at a specific point in time. Revenue Recognition Revenue should be recognized in the period or periods that the revenue-generating activities of the company are performed. 4 4 Revenue recognition criteria help ensure that an income statement reflects the actual accomplishments of a company for the period. In other words, revenue should be recognized in the period or periods that the revenue-generating activities of the company are performed. Realization Principle Record revenue when: AND There is reasonable certainty as to the collectibility of the asset to be received (usually cash). The earnings process is complete or virtually complete. 4 4 The realization principle requires that two criteria be satisfied before revenue can be recognized: (1) the earnings process is complete or virtually complete and (2) there is reasonable certainty as to the collectibility of the asset to be received (usually cash). Premature revenue recognition reduces the quality of reported earnings and can cause serious problems for the reporting company. SEC Staff Accounting Bulletin No. 101 The SEC issued Staff Accounting Bulletin No. 101 to crackdown on earnings management. The bulletin provides additional guidance to determine if the realization principle is satisfied: Persuasive evidence of an arrangement exists. Delivery has occurred or services have been performed. The . | Income Measurement and Profitability Analysis 5 Chapter 5: Income Measurement and Profitability Analysis Learning Objectives Discuss the general objective of the timing of revenue recognition, list the two general criteria that must be satisfied before revenue can be recognized, and explain why these criteria usually are satisfied at a specific point in time. LO1 Our first learning objective in Chapter 5 is to discuss the general objective of the timing of revenue recognition, list the two general criteria that must be satisfied before revenue can be recognized, and explain why these criteria usually are satisfied at a specific point in time. Revenue Recognition Revenue should be recognized in the period or periods that the revenue-generating activities of the company are performed. 4 4 Revenue recognition criteria help ensure that an income statement reflects the actual accomplishments of a company for the period. In other words, revenue should be recognized in the period or periods
