Accounting Case Revenue Recognition Is a Significant

Accounting Case Revenue recognition is a significant issue for several interrelated reasons. Appropriate guidelines for determining when revenue is recognized can keep companies from inflating their profits and boosting their apparent standing as well as establish criteria that makes it more difficult for companies to hide revenue for tax saving purposes or other reasons (Investopedia 2011).

Generally speaking, revenues are recognized when payment is received for the rendering of services or provision of goods by a company, though in certain situations other criteria should be met or events occur before revenue is recognized (Investopedia 2011). Companies that extend large amounts of credit with high rates of return might reasonably count revenues at the time of service/good provision and before actual payment is received, for instance, while companies that receive a lot of returns should do just the opposite.

The matching concept requires that the assets responsible for the creation of recognized revenues be associated with those revenues, such that the cost of producing revenue is clearly observable (Snavely & Horwitz 2011). In other words, the matching concept is a principle that makes it clear which assets are responsible for the earning of what revenue, making it possible to very easily (if simplistically) track a company's revenue stream through even a fairly cursory examination of its financial documents (Snavely & Horwitz 2011).

In this manner, inventories and revenues are paired together, and the effects of changes in one on the other can be more clearly observed by outsiders and responded to by decision makers. Part II Apple, Inc. is a leading computer and technology manufacturer headquartered in the United States, while Royal Philips Electronics (better known simply as Philips) is an electronics firm focusing on healthcare, lifestyle, and lighting equipment and appliances (Apple 2011; Philips 2011).

The following table and description will briefly examine and compare these two companies in terms of their financial standing and accounting practices as observable in the period stretching from Fiscal Year 2009 to FY 2010. It is significant to note that while Apple uses the U.S. GAAP system in the preparation and presentation of its financial documents, as is typical of U.S. companies, Philips uses the IFRS as a guideline, as does most of Europe and indeed most of the world.

(numbers represent dollars in millions) Apple 2009 Apple 2010 Phillips 2009 Phillips 2010 Net Sales 42905 65225 23189 25419 Cost of Sale 25683 39541 15110 15873 Gross Margin 17222 25684 Operating expenses Operating income 11740 18385 2065 Both sales revenue and the cost of sales rose for both companies between 2009 and 2010, though revenues increased at a faster rate and thus both companies posted larger gross margins -- both were more profitable from their operations, in other words (Apple 2011; Philips 2011). This does not necessarily mean that both companies are actually more profitable this year when compared to last, as there are many other.