Question #43
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 37
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Marcel Schulte is analyzing various retailing firms. Which of the following items is least indicative of a potential problem with revenue recognition and earnings quality?
Answer Choices:
A. Implementing a “bill and hold” arrangement
B. Use of barter transactions
C. Disproportionate revenues in the last quarter of the calendar year
Explanation
Disproportionate revenues in the last quarter may be an indication of aggressive revenue
recognition to meet analyst forecasts but it is much more likely if the firm is a non-
seasonal one. A retailing firm presumably has a disproportionate amount of sales during
the busy Christmas season in the last quarter of the calendar year so this point alone
would not be indicative of a potential problem.
In a barter transaction, two parties exchange goods or services. The main issue is whether:
(a) a sale transaction has actually occurred in substance; (b) it is not a "sham" transaction;
and (c) the transaction amount is overstated.
Bill and hold occurs when the retailer (seller) invoices the customer but does not ship the
goods until a later date. Alternatively, the seller may ship the goods to a location other
than the customer's. In either case, the seller may be recognizing revenue prematurely.