Question

A company may try to paint a favorable picture of itself by accelerating the timing of revenues or estimating the collectible amounts too aggressively. In these cases, the quality of accounting information declines because it does not represent the company's true economic condition and may not be sustainable. List four conditions which might suggest that a company is recognizing revenues too early?

Answer 1

Yes, This is true. Sometimes companies try to overstate the revenues and profits and timings of the same so as to show the better picture of the company and to attract the investors but this is true, this practice does not represent the true picture of the company's financial performance.

Conditions are as following which might suggest that a company is recognizing revenues too early-

1. Warranty expenditures are in excess in amount.
2. Large and Volatile amounts of uncollectible accounts receivables.
3. When goods return is in large amount.
4. Increase in days Accounts receivables are outstanding.