October 2008 Archive

If a company changes from one accounting principle to another, whether by choice or by requirement from a new FASB statement orSEC Staff Accounting Bulletin, the cumulative effect of that change may be required to be reported on the income statement. Dows income
statement shows a cumulative effect of $32 million, and it is explained in both the notes, as follows: (more…)

As strange as this may sound, operating income is not the same thing as income from continuing operations.The latter is further down on the income statement, in fact, because it is the result of subtracting interest expense and income taxes from operating income. The income statements of both Duke Energy and Southern Company (see Exhibits 3.3 and 3.4 in Chapter 3) are good, clear examples that show the distinction between operating income and (more…)

Starting at the top of the example income statement as shown in Exhibit 2.6, one typically sees a sales revenue or net sales revenue. Since GAAP require this to be an accrual-basis revenue rather than a cash-basis revenue, it is an amount that reflects what a company has earned, not just what cash it has received.The sales revenue could represent a combination
of cash sales, the earning of cash the company received in a previ-ous period, and the earning of cash the company may receive in a future period. In general, the sales revenue represents what a company has earned performing its normal operations.The recognition of revenue can actually be quite complicated and controversial.The SEC is investigating many companies for their revenue recognition practices. (more…)

Contract sales may involve long-term construction-type contracts or long-term service contracts. As the obligation under the terms of thecontract is fulfilled, the seller should recognize revenue (known as the percentage-of-completion method).When a business has done 50 percent of the work under contract, it should record 50 percent of the contracted
price as revenue. Of course, using this method depends on good estimates of costs and progress and getting the work done. Often, the amount of cost incurred relative to the total cost budgeted is used as a surrogate for the percentage of work completed. (more…)

In general, revenue is recognized (i.e., recorded) at the point of sale. When a customer makes a purchase, the transaction is completed, and the seller has a right to collect payment, the revenue can be recorded. Under the matching principle (matching the expenses incurred to
accomplish a sale, with the revenues earned from the sale), the appropriate costs from the sale, such as cost of goods sold and sales commissions, are also recorded, and the profit is determined. (more…)