3.3. Implications for Financial Analysis

#cfa-level-1 #implications-for-financial-analysis #reading-25-understanding-income-statement #revenue-recognition

As we have seen, companies use a variety of revenue recognition methods. Furthermore, a single company may use different revenue recognition policies for different businesses. Companies disclose their revenue recognition policies in the notes to their financial statement, often in the first note.

The following aspects of a company’s revenue recognition policy are particularly relevant to financial analysis: whether a policy results in recognition of revenue sooner rather than later (sooner is less conservative), and to what extent a policy requires the company to make estimates. In order to analyze a company’s financial statements, and particularly to compare one company’s financial statements with those of another company, it is helpful to understand any differences in their revenue recognition policies. Although it may not be possible to calculate the monetary effect of differences between particular companies’ revenue recognition policies and estimates, it is generally possible to characterize the relative conservatism of a company’s policies and to qualitatively assess how differences in policies might affect financial ratios.


Do you want to join discussion? Click here to log in or create user.