Intermediate Accounting

INTERMEDIATE ACCOUNTING
Author:
Institution:
Date of Submission:
Why is the point of sale usually used as the basis for the timing of revenue recognition?
The point of sale is mostly preferred as a basis for timing revenue recognition because it gives the degree of evidence that accounts perceive as necessary for reliable calculation of periodic business income. Thus, sales transactions with outsiders are the points in the revenue-generation process during which most of the uncertainty concerning the final outcome of the business activity has been considerably alleviated. The point of sale serves as the instance where almost all of the costs of generating revenue are recognized. Furthermore, it is at this point that these costs can be matched with the revenues accrued to produce a substantial statement of the organization’s effort and achievement for a given period. Any attempt at evaluating the company’s income prior to the point of sale is likely to introduce more subjectivity to financial reporting than many accountants would be willing to accept.
Disregarding the special circumstances when bases other than the point of sale are used, discuss the merits of each of the following objections to the sale basis of revenue recognition:
It is too conservative because revenue is earned throughout the entire process ofproduction.
Even though it is recognized that revenue is generated during the entire process of production, it is not feasible to measure revenue merely on the basis of operating activity. This is due to the lack of effective criteria for consistently arriving at a periodic assessment of the amount of revenue likely to be taken up. Furthermore, in many instances, the sale represents the most crucial step in the income generation process. Before the sale, the amount of revenue expected from the production process remains merely prospective revenue. Thus, the realization of such revenue is subject to validation by actual sales. As a rule, the point of sale cannot be viewed as too conservative basis for the timing of revenue recognition. Except in some unusual scenarios, revenue recognition prior to the point of sale remains anticipatory, and unverifiable in the actual amount.
It is not conservative enough because accounts receivable do not represent disposable funds, sales returns and allowances may be...