Briefly Explain How a Company That Recognized Revenue Under the Percentage-Of-Completion

question 76

Essay

Briefly explain how a company that recognized revenue under the percentage-of-completion method (estimating percentage of completion using a cost-to-cost ratio) could manage earnings upward to meet a profit projection. What sort of ethical problems could result from that earnings management?

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Definitions:

Unrealized Profits

Profits that have been generated on paper due to the appreciation of an asset's value but have not yet been realized through a transaction.

Upstream Transactions

Transactions where a subsidiary sells goods or services to its parent company, often scrutinized for transfer pricing issues.

Gross Profit Percentage

A financial metric indicating the proportion of money left over from revenues after accounting for the cost of goods sold, expressed as a percentage.

Undervalued Inventory

Inventory that is reported at a value lower than its actual market value, potentially affecting financial statements and tax liabilities.