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Financial Accounting






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Financial Accounting
MODULE 2/ Case Assignment 2
ACC201 Financial Accounting/Case 2
Case Assignment:
There are three main parts to this case that requires you to prepare and submit a three to five page
paper. Please make sure this paper is well organized and covers all of the items below. Part I.
* Why is revenue recognition a significant issue? How do we determine when revenues are recorded for
accounting purposes? * Explain the difference between a product and period expense. * Discuss the
matching concept as it relates to accounting for revenues and inventory.
Part II. Refer to the latest annual financial statements for the two following companies: Apple: and Philips: Generally, this
information is found in the Investor Relations area of the website. Clearly identify the companies, the
time period, and include the link to the financial statements you are analyzing in your report.
* What accounting conventions do the two companies follow US GAAP or IFRS? * Locate 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? * Is it easy to discern trends or compare the
information from year to year and between the two companies? Please, comments on both aspects and
show some examples.
Modular Case Assignment Expectations:
The submission should be 3 to 5 pages and need to include answers to all the questions listed above.

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Show computations, discuss the results and include references in APA format.
For this case assignment, I needed to discuss why is revenue recognition a significant issues and how
do we determine when revenues are recorded for accounting purposes. Also to be able explain the
difference between a product and period expense. Also I will discuss the matching concept as it relates
to accounting for revenues and inventory. Lastly, analyze the latest annual financial statements for the
following companies: Apple and Phillips. First thing I would like to deliberate is, why is revenue
recognition a significant issues and how do we determine when revenues are recorded for accounting
purposes. Determining and reporting revenues are among the most critical concerns in financial
reporting. Without a doubt, the timing of revenue recognition has significant impact both the top and
bottom lines of the income statement as well as the balance sheet. Such timing can have effects on
share prices as stockholders differentiate the actual results with analysts’ predictions. Additionally, the
classification and acknowledgement of certain elements related to revenue activities can affect the
clarification of financial statements. Revenue recognition becomes a major concern as companies
attempt to meet market expectations. Many corporations conclude last-minute deals to reach their
revenue targets and sustain revenue development. Revenue should be reported when it is earned, or in
cash accounting, when the cash payment is made. This helps to determine the accounting period or the
period of time in which revenue and expenses must be recorded. Universal rules in the revenue
recognition principle are the revenues are reported as soon as the goods or services being offered in
exchange for payment have been finalized. For most businesses, recognition of revenue is based on
when the revenue has been realized, that is, when a price has been agreed with the purchaser and the
seller has completed all obligations. Few businesses rely on collection or receipt of payment. For some
companies, revenue recognition is range over time as in the installment or time-of-completion system. All
costs directly connected with given revenue must be coordinated with that revenue. Some expenses are
not linked with specific revenue items but with a given time period. The next topic I would like to
elaborate is the difference between a product and period expense. Product costs or variable costs are all
such costs that form part of the inventory. The product cost is the cost of all the different components
which make up the product. This may either be the purchase price if the components are bought from
outside suppliers, or the combined cost of materials and manufacturing processes if the component is
made in-house. Period costs or fixed costs are all such costs that are not incurred in connection to the
production. Period expenses are those which occur during a period of time and cannot be easily
associated with products or the production process. Period expenses are those for selling and
administrative functions – as opposed to manufacturing functions. Examples of period expenses include
rent, interest, taxes, sales salaries, etc. Rent on a factory, for instance is constant for a period
regardless of how many units were produced in that factory. The next thing I would like to discuss the
matching concept as it relates to accounting for revenues and inventory. The matching principle in
accounting in general is when you match expenses incurred with the revenue in the same period. When
you sell merchandise from the Merchandise Inventory account, you are generating revenue but are also
giving up some merchandise you had to create that revenue. Thus the matching principle dictates that
you match the cost of the inventory sold in the form of Cost of Goods Sold against the Revenue in the
form of Sales. Accountants call their attempt to match revenues against the appropriate expenses as the
matching concept. Once the Revenues are recognized, the next step is to allocate it among the different
accounting periods if required and this is achieved with the help of the accrual concept which related the
expenses to the Revenues for a given accounting period. It means that after the Revenues have been
determined or measured for a given accounting period, the expenses incurred to earn that Revenue
must be deducted to calculate the Net Income. The term matching, then, refers to a close correlation that
exists between certain expenses and revenues recognized as a result of sustaining these costs. Lastly, I
would like to explore the income statement on both companies Apple and Phillips for the past two years.
First I would to discuss Apple income statement. GAAP or Generally Accepted Accounting Principles are

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the guidelines for financial accounting in the United States. Apple started selling the iPhone and the
Apple TV in 2007, two products it wanted to provide free software updates for over their usual life spans
(24 months). Because of this, the GAAP requires that Apple use subscription-based accounting for these
two products; which means that almost all revenue and cost of goods are deferred over the life of the
product; again 24 months. Because of this, Apple’s numbers can look weaker than they actually are. On
the other hand Philips adopted US GAAP as its primary accounting standard back in 2002. To meet
Dutch legal requirements the Company reconciles from US GAAP into Dutch GAAP and provides this
additional information in the annual report. Philips is the leading company in health and well-being. It is
well positioned in highly attractive and geographies to capitalize on global trend. Attached below is the
income statement of Apple and Philips, shows the profit or loss of the company during the specific
accounting period. The consolidated statement of income shows on both companies the periods of two
years. Over the years with the acquisitions that were done, in 2011 the Apple Company had a net profit
of $25,922,000 and 54 % increase from 2010. The income statement is important in Apple’s case
because inventors will use the information to see whether the company is in a strong position for growth
and how well they are financially. The statement of cash flow is used by a company when making a
business decision. The cash flow shows the revenues the company is generating and the total expenses
incurring during the specific accounting period. It was the other way around for Philips Company; the net
profit was negative 1291 decreased tremendously from the chart showing below. Both management
reviews the information provided in the financial statements with a combination of development, vertical,
and ratio analysis. The data is compared annually to show the percentage increase in the individual
amounts, and the data is reviewed as a percentage of revenues in determining if costs of earning
revenues are constant or changing as the amount of revenue is adjusted. The expenses as a percentage
of revenues all increased during the year causing the restaurant level profit to be equal to the profit of the
previous year that indicates no growth in operating activity although the business is growing
Summary Apple Income Statement. Business Finance. Retrieved Sep 3, 2012 from the World Wide Web: Summary Philips Income Statement. Business finance. Retrieved Sep 7, 2012
from the World Wide Web:

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Excellent resource! Really helped me get the gist of things.