Kendall Square Research Corporation (KSR) is a computer designing company. The company first venture in computer designing business in 1986, with the driving founders being Henry Burkhardt III and Steve Frank. The business venture has had its great and memorable performance, which has since attracted customer continued loyalty both from the public and the private sector. For instance the firms’ product is reportedly accepted in the market, with major sales being to the university laboratories and commercial users. This introduces as to the audit report fairly representing revenue among other direct transactions in a three year period ended 26th, December, 1992. This report according to the Price Waterhouse reflects a fair and true position of KSR. However, their suggested issues that the auditors felt, they required close attention, this involve firms policies practiced in recognizing revenue from its product (Harvard Business School, 3). The audited report clearly reflects higher performance and persisted consistence that has helped the firm work above the break-even with the first 6 year after its establishment. Furthermore the improvement is portrayed through increased investment indicators on the public stock offering as the audit report clearly points out and improved performance from $80 million to $ 150 millions in April 1992 and April 1993 respectively.
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The audit reports indicate slowed the process by the KSR in its action directed in claiming debts. On the contrary, the accounting principles on accrual together with the matching concept principle, gives specifications determining revenue and expenses when realized, earned in this case when shipment of KSR product is completed. This liberal act practiced by KSR might work against improved performance and part of the transaction end up in bad debt. As reported by the Press Waterhouse auditors the firm has no proper records, involving revenue recognition. The management concern has to develop a strategic system that will handle credit repayment, while developing a timeframe in accordance to the Generally Accepted Accounting Principles (GAAP). The accepted standards demands that accrued revenue is documented in the records prior to cash is received, while the deferred revenue is recognized after cash is paid, this serves to explain that payment can either be made either earlier or in latter period than goods or services are actually delivered. As reduced account receivable duration grants the firm an open opportunity to equality strategies on creditors, in this case the outsourced services like those of the price Waterhouse audit services, bank loans among other credit arrangements (Harvard Business School, 3). In recognizing revenue, once the order is completely accepted by the respective customers, the accounting organ has a duty to have the transaction recorded in their respective accounts. This clearly recognizes credit arrangements as well help in identifying firms liabilities. When issues of claiming current assets are well addressed the business cash flow is freed from subsequent delays that work towards reducing business efficient performance. Although the terms of trade practiced by KSR are liberal as it concerns ethical conducts in accounting, their strategic culture attracts customers this motivates the leadership approach to their business challenges as argued by Harvard Business School (4). Fundamentally, finance is a knowledge regulation, the business principles coherently is influenced by economic behavior, the social factor and the management alternatives. KSR leadership through embracing the technical issues such as the mix of business equity, debt, dividend policy while evaluating the adaptive business investment in a diverse manner.
The KSR revenue earnings are impressive throughout the period there are records indicating an estimated increase from $20.7millionas to about $ 60million. The transaction has to be recognized at the time they are made, but for the delayed payment this works against business ethics. The business policies might vary in policy strategies KSR’s structural policies are unique and works towards customer certification. This is fundamental as reports indicate a successful venture although despite the loss experienced in the third quarter, which is estimated to be the net loss of about 29% of the grant total. Generally, revenue recognition has an impact on six elements on the infrastructure of the business systems, methodology, and business processes. The systems are designed to drill down all organization performance. In this case, the audit report reveals part of the weakness that serves to threaten business factions in KSR firm.
The Installment Sales Method
This principle allows for revenue to be recognized after the sale and the subsequent proportion allocated to the products valued in the gross profit as a percentage. The unearned income, in the case the pending balance due to the sale of the processer will apply to the arrangement this action is acceptable accordance to the GAAP standards. The contract clearly has a specified pricing and payment option. There are either identified to be percentage of completion or completed contract method. For contractual term that agrees according to the percentage, the revenue therefore is recognized based on the contract progress. While the completed method only applies if percentage is not used, under this method revenue, costs and the gross profit is recognized after a full completion of the contact. The $ 1.5 million contract lies in the complete method here the firm has all the rights according to the accounting practice in terminating the contact if not completed, the rules and procedures are complex and have been developed for long periods, this might have different understanding, while account for different types of transaction, varies the modes of recognition and reporting as argued by (Harvard Business School, 2). The element of cost recovery method applies to all the transaction that has high probability of uncontrollable payments. This process prohibits revenue recognition to a certain limit but when the collection amount exceed the products seller’s cost as seen in the context of KSR, then the seller has to start recoding or recognizing the sells earned. In the case the accountants were fairly responding to the required standards. The amount collected that is above the cost initially incurred is retained as the anticipated gross profit (Harvard Business School, 4).
Basing on the GAAP policies, revenue is recognized in the earlier or in the latter period. Kendall Research policies works in recognition of this standardized accounting policies. As goods delivered and the relevant revenue recognized in two the general rule, that further comprise sales verses cash timing, and recognizing cash paid in advance. This is well reflected in the audit report. The second acceptable rule applied exceptions in recognizing revenue earned. In the context, Kendall research data again revenue recognized before the sale and those that are not recognized at the sale. This case involves contractual method accepted to apply in accounting standards such as the percentage of completion method and the completed contract method.