Phillips & Apple (Income Statement) - Essay Example

? ACCT CASE 3: Income ment October 14, Part I. Why is revenue recognition a significant issue? The revenue recognition is a significant issue. Noncompliance with the revenue recognition will create undue disadvantage to the fraudulent person or company. The violation of the revenue recognition principle constitutes misunderstanding among the different users of the financial statements. The violation will create distrust among the affected parties. When mistrust crops up, many of the financial statement users will divest their investments in the company or avoid dealing with the fraudulent company. The principle ensures that revenues are recorded in the accounting period that they are earned. To be earned, the products must be sold, to increase understanding between the financial statement preparers and the financial statement users. How do we determine when revenues are recorded for accounting purposes? There are requirements before revenues are recorded for accounting purposes. First, revenue should only be recorded when the service had been rendered to the company’s current and prospective customers. Revenue should only be recorded when someone buys or takes the company’s products and services. The company cannot record a sale of $ 2,500 if no one has agreed to buy the product. Doing so would violate the revenue recognition principle. When a customer pays for the product and receives the product, then the company complies with the revenue recognition principle when the $2,500 amount is entered into the books as a credit to revenue or sales. There must be an exchange between cash that is paid by the customer, an accounts receivable for collectible customer accounts, and the company’s giving the products to the customers. However, companies do allow installment sales. Installment sales comply with the revenue recognition principle because there is a transfer of goods from the company to the customers. When the company finished performing a service, the company can recognize service revenue because the service had been done and the customer is satisfied with the services rendered (Drury, 2007). Explaining the difference between a product and period expense There is a big difference between product expense and period expense. Product expense includes all expenses incurred to make the final product ready for sale to the company’s current and prospective customers (Drury, 2007). For example, the product expenses in the making of a chair include the wood that is used to make the chair. Next, the product expenses include the nails that are used to join the pieces of cut wood together. The paint that is used to make the constructed chair more presentable to the customers’ eyes forms part of the chair’s product expenses. The salaries of the carpenters who contributed to the making the chairs form part of product costs. The indirect factory expenses form part of the product costs. The indirect costs include indirect materials and indirect labor. To make the discussion short, all expenses incurred in the factory forms part of product cost. All expenses incurred by the administration department do not form part of the product costs. All promotion advertising, customer entertainment and other marketing expenses are not included in the product expense. In a merchandising business, the product cost is the cost of making the product available to the current and prospective customers. The cost of purchasing the product forms part of the product costs. The cost of goods sold of the merchandising company equates to product expenses (Bierman, 2010). Period expenses are expenses that do not qualify as product expenses. The salary of company’s president is period expense. Marketing expenses are period expenses. The marketing expenses include amounts paid to entertain current and prospective customers of the company. Marketing expenses include advertising costs of placing the company’s ads in television, radio, internet, and newspaper spaces. The company lawyer’s salary forms part of period costs (STickney, 2009). Discuss the matching concept as it relates to accounting for revenues and inventory. The matching concept connects the cost of inventory to the related revenues. For example, the company purchases a product at $250 in 2012. The company then sells the product in 2013. Using the matching concept, the cost of purchasing the product, $250, should not be recorded as part of cost of sales amount during 2012. Generally Accepted Accounting Principles dictates that the amount of $250 should be recorded as an asset in 2012 since the product has not been sold. The asset account title for the unsold product is: inventory. When the product is sold in 2013, the company now removes the $250 amount from the inventory account. The company records the $250 under the cost of goods portion of the income statement during 2013. This way, there matching concept application shows how much the company generated, in terms of gross profit and net profit data. In the same manner, only the cost of purchasing products that are sold in 2012 should be included as part of the 2012 cost of goods sold (Bierman, 2010). Part II. Clearly identify the companies, the time period, and include the link to the financial statements you are analyzing in your report. The Apple Company provides the annual financial statements through its website (http://investor.apple.com/financials.cfm). Apple produces many products that include mobile communication devices, personal computers, portable digital music players, and other related products. The company sells its products to the global market. Philips Company offers its annual financial reports through its website. (http://www.annualreport2011.philips.com/downloads/index.aspx). Philips sells electrical products, including light bulbs and fluorescent lamps to the global market. • Accounting conventions of the two companies follow (US GAAP or IFRS) Apple Company uses the Generally Accepted Accounting Principles (U.S. GAAP) in the preparation of the financial statements. The company prepares annual financial reports (http://investor.apple.com/financials.cfm). Philips Company prepares its financial statements using the International Financial Reporting Standards [FRS] (http://www.annualreport2011.philips.com/downloads/index.aspx). The company prepares annual financial statements. • Location of the income statement for the past two years for both companies. Prepare a table comparing five items or more from each statement. Comment on the changes from one year to another. Is the company doing better or worse? Did revenues and expenses increase or decrease? Apple. There are differences between the two company’s income statement accounts. Net income figures indicate Apple fared better in 2010, compared to 2011 output. The amount decreased from 2010 to 2011. In terms of sales figures, Apple fared better in 2011, compared to 2010 output. The amount increased from 2010 to 2011. In terms of cost of sales figures, Apple fared better in 2010, compared to 2011 output. The amount increased from 2010 to 2011. In terms of operating expense figures, Apple fared better in 2010, compared to 2011 output. The amount increased from 2010 to 2011. In terms of Gross profit figures, Apple fared better in 2011, compared to 2010 output. The amount increased from 2010 to 2011. Philips. There are differences between the two company’s income statement accounts. Net income figures indicate Philips fared better in 2010, compared to 2011 output. The amount decreased from 2010 to 2011. In terms of sales figures, Philips fared better in 2011, compared to 2010 output. The amount increased from 2010 to 2011. In terms of cost of sales figures, Philips fared better in 2010, compared to 2011 output. The amount decreased from 2010 to 2011. In terms of operating expense figures, Philips fared better in 2010, compared to 2011 output. The amount increased from 2010 to 2011. In terms of Gross profit figures, Philips fared better in 2011, compared to 2010 output. The amount increased from 2010 to 2011. Table 1: Income Statement Accounts of Apple Company and Philips Company. Account Philips (2010) Million € Philips (2011) Apple (2010) Million $ Apple (2011) Net income 1,446 (1,295) 25,922 14,013 Sales 22,287 22,579 65,225 108,249 Cost of Sales 13,181 13,932 39,541 64,431 Operating Expenses 7,082 7,611 7,299 10,028 Gross Profit 7,573 9,096 25,684 43,818 • Is it easy to discern trends or compare the information from year to year and between the two companies? It is easy to discern trends of compare the information from year to year and between the two companies. Comparing the two year operations, the readers of the financial statements can see whether one financial statement account increased decreased between two accounting periods. In addition, the readers of the financial statement can see whether Apple generated higher amounts compared to the Philips amounts. For example, Philips’ 2010 net income, €1,446 million decreased to ($1,295) in 2011. This shows that Philips fared better in 2010 when compared to the 2011 amount, ($1295). In terms of sales, Apple fared better than Philips. Apple’s sales jump significantly from $65,225 to a huge $108,249. On the other hand, Philips only generated a minimal increase from 2010 to 2011. The Philips Company’s €22,287 (2010) slightly jumped to the higher $22,579 (2011) REFERENCES: Bierman, J. (2010). An Introduction to Accounting and Managerial Finance. New York: World Specific Press. Drury, C. (2007). Management and Cost Accounting. New York: Cengage Learning Press. STickney, C. (2009). Financial Accounting. New York: Cengage Learning Press. Read More