UnThreaded | Threaded | Whole Thread (5) | Ignore Thread Prev | Next
Author: fooooopherenz Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 86  
Subject: Re: Question Date: 4/6/2003 11:21 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Why do people get nervous when a company's earnings fluctuate?

People tend to believe that those in charge of a company have some degree of control. The company needs to set its budget and plans according to the revenues that will be taken in. If a company can not predict its revenues with some degree of accuracy how can it possibly plan for its future? If the management of a company can not make an accurate forecast of its earnings how can investors? When their are unexpected spikes (in either direction) in revenues it shows that managements planning is not as good as it could be.

Why is it a given that companies need some flexibility in when they book revenue, to make people less nervous?

Companies are given a little bit of flexibility as to when they book revenues because the way businesses earn revenues are different. It's easy to see that a retailer such as Walmart should book revenues at the point of the sale, when the payment is made and the sale is complete. Now, a road construction company that is working on a three year project with payment dispursed throught the time period is a different story.

The Realization Principle (A.K.A. Recognition Principle) requires that revenue be recognized at the time, but not before, it is earned. This can get pretty fuzzy sometimes. Just because someone pays you doesn't mean you've earned it yet (unearned revenue/deposits/retainers). Also, just because you haven't been paid yet doesn't mean you haven't earned it (sale/services on credit).

Typically a sale/service is booked as revenue when the company has earned the right to payment, whether they receive payment or not.
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (5) | Ignore Thread Prev | Next

Announcements

Post of the Day:
Macro Economics

Intel's Broadwell Potential
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement