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Income Measurement and Profitability Analysis


Key to income measurement is the timing of revenue and expense recognition. The matching principle states that we recognize expenses in the period we recognize the related revenues. The timing of revenue recognition, therefore, is critical to income measurement. The focus of this chapter is revenue recognition. We also continue our discussion of financial statement analysis.



Discuss the general objective of the timing of revenue recognition, list the two general criteria that must be satisfied before revenue can be recognized, and explain why these criteria usually are satisfied at a specific point in time.

Describe the installment sales and cost recovery methods of recognizing revenue for certain installment sales and explain the unusual conditions under which these methods might be used.

Discuss the implications for revenue recognition of allowing customers the right of return.

Identify situations that call for the recognition of revenue over time and distinguish between the percentage-of-completion and completed contract methods of recognizing revenue for long-term contracts.

Discuss the revenue recognition issues involving software and franchise sales.

Identify and calculate the common ratios used to assess profitability.





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