Question

Problem 5: Revenue Recognition (3 points) FlexMotors, Inc. manufactures a variety of electronic drills and grass cutters. Recently, it introduced a new line of handheld drills that generates much less noise and consumes much less energy, but carries a much higher price tag. The company is currently considering whether it should record $1.2 million of revenue upon shipment. Under the contract, FlexMotors is obligated to accept any products from the distributors if they are not sold within 6 months. The company is confident that the new model will sell, but is unable to accurately estimate returns, because it has never sold anything quite like it. Required: How much revenue should FlexMotors recognize upon shipment to distributors?

Answer 1

The Prudence or Conservatism Principle is many a time described using the phrase " Do not anticipate a profit, but provide for all possible losses." In other words, it takes into consideration all prospective losses but not the prospective profits.

According to the conservatism principle is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received.

So FlexMotors should recognize their revenues upon shipment to distributors whenever revenue actually realise.