“Aggresive revenue recognition practices typically results in an increase in recievables” aggresive rev recog means recognising rev too soon. But how does this increases the accounts recievables??
Suppose that you’re working a 5-year contract with the entire payment of $10 million at the end. If you use the completed contract method, you recognize no revenue until the end of the project. If you use the percentage of completion method, you recognize revenue along the way; because you don’t get paid until the end, it’s all Accounts Receivable.
It depends on the circumstances - I don’t know if saying that it “typically” overstates AR is really correct - percentage completion method is not common for a lot of industries (would be most common in specialised manufacturing/construction). A few other examples of aggressive rev rec:
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Releasing unearned/deferred revenue to income (AR irrelevant)
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Recording too low a provsion for returns/warranty/sales discounts (AR irrelevant)
I would agree with usage of word typical as aggressive revenue recognition is really all about pulling revenue from the future and hence you have not really received payment for it - results in an increase in accounts receivables. The 2 examples by CADFX notwithstanding, it is far too common to have change DSO (or ACP) used as an indicator of revenue quality.
D**n !! I SWEAR to god i always knew that Revenue which is still unpaid is nothing but accounts recievables . Dunno why i got this doubt last night while reading !! It just didnt click to me that time. Now I Feel ashamed that i cleared level 1 and still asked this silly doubt. *facepalm*
Shall we contact CFA Institute and ask them to retabulate your exam, in case they made a mistake?
