Cost account Essay

This essay has a total of 915 words and 5 pages.

cost account

Justin Denman
Accounting and Auditing Processes
March 4, 2000
Writing Assignment #1

Revenue Recognition Policies

The purpose of this paper is to compare the revenue recognition policies of two companies
in the search, detection, navigation, guidance, and aeronautical systems industry. The two
companies I have selected are Aerosonic Corporation, and Esco Electronics Company.

Esco Electronics Company is engaged in the design, manufacture, sale and support of
engineered products. These products are used principally in filteration/fluid flow
applications, electromagnetic compatibility (EMC) testing, and electric utility
communications and control systems. The filtration/fluid flow and EMC testing products are
supplied to a broad base of industrial and commercial customers worldwide. At the present
time, electric utility communications systems are marketed primarily to customers in North
America. The four primary industry segments of Esco are Filtration/Fluid Flow, Test,
Communications, and other.

In order for Esco to conform with generally accepted accounting principles, management
must make careful estimates in preparing the financial statements. These estimates are for
anticipated contract costs and revenues earned during the life of the contract. These
amounts affect the reported amounts of assets and liabilities on the company's financial
statements. Actual results could differ from these numbers.

Revenues are recognized on commercial sales when products are shipped or when services are
performed. Revenue on production contracts are recorded when specific contract terms are
fulfilled. These amounts are determined either by the units of production or delivery
methods. Revenues from cost reimbursement contracts are recorded as costs are incurred,
plus fees earned. Revenue under long-term contracts in which the previous two methods are
inappropriate, the percentage-of-completion method is used. Revenue under engineering
contracts are generally recognized as certain "milestones" are attained.

The percentage-of-completion method recognizes a portion of the estimated gross profit for
each period based on progress to date. Progress to date is based on three factors. These
three factors are the costs incurred to date, the most recent estimate of the project's
total cost, and the most recent gross profit percentage. Progress to date is assumed to be
the proportion of the project's costs incurred to date divided by total estimated costs.
This fraction is known as the estimated percentage of completion, and is the estimated
percentage of completion. However, he biggest flaw with this method is that it only deals
with costs. This means that there may not be strong correlation between physical progress
and costs incurred. Conceptually, one would want to match revenues when the earnings
Continues for 3 more pages >>




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