Phillips & Apple (Income Statement) Essay Example | Topics and Well Written Essays - 1500 words

Phillips & Apple (Income Statement) - Essay Example The violation will create distrust among the affected parties. When mistrust crops up, many of the financial statement users will divest their investments in the company or avoid dealing with the fraudulent company. The principle ensures that revenues are recorded in the accounting period that they are earned. To be earned, the products must be sold, to increase understanding between the financial statement preparers and the financial statement users. There are requirements before revenues are recorded for accounting purposes. First, revenue should only be recorded when the service had been rendered to the company’s current and prospective customers. Revenue should only be recorded when someone buys or takes the company’s products and services. The company cannot record a sale of $ 2,500 if no one has agreed to buy the product. Doing so would violate the revenue recognition principle. When a customer pays for the product and receives the product, then the company compli es with the revenue recognition principle when the $2,500 amount is entered into the books as a credit to revenue or sales. There must be an exchange between cash that is paid by the customer, an accounts receivable for collectible customer accounts, and the company’s giving the products to the customers. However, companies do allow installment sales. Installment sales comply with the revenue recognition principle because there is a transfer of goods from the company to the customers. When the company finished performing a service, the company can recognize service revenue because the service had been done and the customer is satisfied with the services rendered (Drury, 2007). Explaining the difference between a product and period expense There is a big difference between product expense and period expense. Product expense includes all expenses incurred to make the final product ready for sale to the company’s current and prospective customers (Drury, 2007). For exampl e, the product expenses in the making of a chair include the wood that is used to make the chair. Next, the product expenses include the nails that are used to join the pieces of cut wood together. The paint that is used to make the constructed chair more presentable to the customers’ eyes forms part of the chair’s product expenses. The salaries of the carpenters who contributed to the making the chairs form part of product costs. The indirect factory expenses form part of the product costs. The indirect costs include indirect materials and indirect labor. To make the discussion short, all expenses incurred in the factory forms part of product cost. All expenses incurred by the administration department do not form part of the product costs. All promotion advertising, customer entertainment and other marketing expenses are not included in the product expense. In a merchandising business, the product cost is the cost of making the product available to the current and pr ospective customers. The cost of purchasing the product forms part of the product costs. The cost of goods sold of the merchandising company equates to product expenses (Bierman, 2010). Period expenses are expenses that do not qualify as product expenses. The salary of company’s president is period expense. Marketing expenses are period expenses. The marketing expenses include amounts paid to entertain current and prospective customers of the company. Marketing expenses include advertising costs of placing the company’s ads in television, radio, internet, and newspaper spaces. The company lawyer’