Revenue Recognition and Accounting Practice: Apple vs. Philips

Revenue Recognition and Financial Integrity

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 make it more difficult for companies to hide revenue for tax-saving purposes or other reasons. 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.

Companies that extend large amounts of credit with high rates of return might reasonably count revenues at the time of service or good provision and before actual payment is received, for instance, while companies that receive a lot of returns should do just the opposite. Understanding revenue recognition principles is essential for accurate financial reporting and maintaining stakeholder trust.

The Matching Concept in Practice

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. 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 track a company's revenue stream through even a fairly cursory examination of its financial documents.

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. This principle ensures transparency and enables stakeholders to understand the relationship between cost of goods sold and revenue generation.

Apple and Philips: A Financial Comparison

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. 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 fiscal year 2010.

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. This does not necessarily mean that both companies are actually more profitable overall when compared year to year, as there are many other considerations that need to be taken into account, but as far as their income from direct operations, both companies were more successful in 2010 than in 2009.

The same basic trends are seen when examining the operating income and operating expense lines for both companies: both items are higher in 2010 than in 2009, yet income rose more than did expenses. Apple does a much higher volume of business than does Philips, and the margin between its operating income and operating expenses is significantly larger in absolute and relative terms than the same margin for Philips.