Question

Concept Review

(a) In your own words, define “Revenues.” Explain how revenues are different from “gains.”

(b) What is performance obligation and how is it related to revenue recognition?

(c) In general, what incentives do managers have to make self-serving revenue recognition choices?

Answer 1

a) Revenue is the income generated from normal business operations. Mainly a revenue of a company is sales. Gains is the opposing financial results that will be produced through a company’s non-primary operations and production processes.

b) A performance obligation is a promise to transfer to the customer a good or service (or a bundle of goods or services). Revenue is recognised when/as performance obligation are satisfied in the amount of transaction price allocated to satisfied performance obligations.

c) Here the answer for the question explained through an example: i.e. Apple’s managers recognize revenue from hardware products such as Macs, iPhones, iPods, iPads… Along with their software which is bundled with hardware that is essential to the hardware’s performance, and third-party digital content that is sold on the iTunes Store. The more Apple’s managers sell their products the more revenue they will receive. But managers must make a choice in order to figure out how to classify the revenue on the financial statements and balance it accordingly with the expenses that go along with the revenue under the matching principle. How much they have to account for the expected receivable amount that expecting not to collect in the accounting period