Accrual Concepts

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Accrual Accounting Concepts
The Navigator • Scan Study Objectives • Read Feature Story • Read Preview • Read text and answer Before You Go On p. 169 p. 174 p. 183 • Work Using the Decision Toolkit • Review Summary of Study Objectives • Work Demonstration Problem • Answer Self-Study Questions • Complete Assignments
Feature Story What Was Your Profit?
The accuracy of the financial reporting system depends on answers to a few fundamental questions. At what point has revenue been earned? At what point is the earnings process complete? When have expenses really been incurred?
During the 1990s' boom in the stock prices of dot-com companies, many dot-com companies earned most of their revenue from selling advertising space on their Web sites. To boost reported revenue, some dot-coms began swapping web-site ad space. Company A would put an ad for its website on company B's website, and company B would put an ad for its website on company A's website. No money ever changed hands, but each company recorded revenue (for the value of the space that it gave up on its site). This practice did little to boost net income and resulted in no additional cash flow—but it did boost reported revenue. Regulators eventually put an end to the practice.
Another type of transgression results from companies recording revenue or expenses in the wrong year. In fact, shifting revenues and expenses is one of the most common abuses of financial accounting. Xerox recently admitted reporting billions of dollars of lease revenue in periods earlier than it should have been reported. And WorldCom stunned the financial markets with its admission that it had boosted net income by billions of dollars by delaying the recognition of expenses until later years.
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Unfortunately, revelations such as these have become all too common in the corporate world. It is no…...

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