Revenue Recognition for a Computer Hardware Company Essay

Revenue Recognition for a Computer Hardware Company - Essay Example At the beginning of 2001 the Enron Corporation scandal was covered by the media. The consequence of cooking up the numbers for Enron was a complete depreciation of its corporate stocks and an eventual bankruptcy filing. In this current market investors are weary and need reassurances that public companies are making sure its accounting and financial numbers are legit. The smallest irregularities could seriously affect the firm’s secondary stock issuance which is set for February of 2002. There are some issues that need to be attended immediately concerning the revenue recognition practices of the company. The company’s main auditors, Peale & Gowell & Quill, are concerned about four particular financial transactions that occurred recently. I am also concern about the transactions which involved revenue recognition. Most of these transaction are not recognizing the company’ revenue in the correct manner and will affect this financial results of this fiscal year by overstating the actual income of the company. The transactions are violating the generally accepted accounting principles (GAAP) and accounting theory. The revenue recognition principle states that revenue may be recognize in the accounting period in which it is earned (Weygant & Kieso & Kimmel, 2002, p.90). The first irregular transaction involves a transaction between the company and Elegant Housing. In this sale the company took a $20,000 non-refundable retainer and gave Elegant $400,000 of merchandise on trail a basis for six months. The company recognized the entire sum as earned revenue. This transaction i s wrong and should not be registered in this way. An accountant must always follow the principle of conservatism, which states that when in doubt the accounting alternative that is least likely to overstate assets and profits should be chosen (Narayanan & Bukart, 2005). A proper recognition of the transaction would be recognizing $20,000 as