This research examines the issue of revenue recognition. Revenue recognition is a somewhat misleading broad term to describe an issue that encompasses the timing of the recognition in financial income statements of all items affecting profit and loss. There exist recognized and legitimate reasons for different approaches to the timing revenue and expense recognition across industries; however, in the absence of special cases unique to a particular industry, revenues and expenses are generally expected to be recognized in the financial period in which they are either earned or are incurred. those described above also occur with respect to expense recognition. In order to bolster reported financial performance in a given financial period, a company may elect to recognize expenses incurred in that period in some other period, either past or future. The motivations for such actions are the same as those that motivate a misrecognition of revenue. In such cases, these companies are willing to incur additional the federal income tax liability associated with the higher income because the public perceptions managerial performance will be enhanced or the public trading price of a company's equity shares will be strengthened or any of a number of other motivations or combinations of motives.
Why Companies Stray From the Revenue and Cost Recognition Requirements
Companies that manipulate revenue and cost recognition do so most often for the purpose of inflating current period profits to disguise a poor year, or to defer the recognition of profits for the purpose of both spreading and reducing the income tax burden. The most common practices by which companies misrecognize revenues or expenses are (a) recording revenue too soon, (b) recording bogus revenues, (c) using an unrealistically low basis to record revenue for a one time gain, (d) shifting current expenses to a later period, (e) failing to recognize or disclose some liabi...