"Playing with Numbers: Revealing the Secrets of Earning Manipulation"

Technique-2: Recording Revenue Far above work completed on the contract.

Let us understand why companies indulge in these illegal practices.

The Government🏛, Business owners🧑‍💼, Investors🧑‍💼, RBI, Banks🏦, Investment bankers🏛️, FIIS, DIIS, everyone wants the Stock market Index (SENSEX, NIFTY- 50) to rise. WHY?

The Stock market index act as a barometer of an economy🌍.

The GDP growth📈 is influenced by the stock market. And the stock market rises📈 with Sales growth📈.

Indeed, few companies follow illegal practices to inflate Sales or revenue💹.

Back to Technique-2: Recording Revenue Far above work completed on the contract.

Technique 2 is achieved by following Percentage-of-completion (POC) Accounting principle.

POC revenue recognition allows companies to report revenue even before a project has been completed. It was introduced so that firms working on Long-term construction-type contracts could report business activity each period even if a product was not delivered to the customer.

Under this framework, companies are expected to estimate the proportion of the project that has been completed and to recognize a pro-rata share of the total project's revenue, expenses, and profits.

Investors should be extra vigilant when analyzing companies using POC accounting since reported results hinge on the company's estimates about its own progress.

POC accounting grants management considerable flexibility to recognize revenues in the current year that would typically be earned in future years.

How to spot🔎 companies who🔍 are using PSO in their favor?

Solution:

1-Reading Footnotes- Companies can change their revenue recognition policy for ongoing projects to inflate sales and operating profits.

2-Accounts Receivable (AR) is a term used in accounting to refer to the money owed to a company by its customers or clients for goods or services that have been delivered or provided on credit. It represents the amount of money that the company has a right to collect from its customers.

3-Days Sales Outstanding (DSO), also called Debtor Days, measures how promptly customers pay their bills compared to the speed at which revenue is recognized. A higher DSO suggests more aggressive revenue recognition and poor cash management.

DSO= (Accounts Receivable /Total Sales)​ × 365

The lower👇 the accounts receivable and debtor days values, the better👍.

Don't follow my views at least start doubting🤷 others.