Question

describe specifically why the revenue recognition practice of Dex were not appropriate under GGAAP

Answer 1

Dex increased their revenue by boosting up the publication date of its directory with the sole intent of increasing the revenue in the current financial year. Dex did the same by adopting a “point of publication” accounting method rather than recognizing the revenue for each month of publication life over time. Specifically, Dex decided to publish its Colorado directory in December 2000 instead of January 2001 which means adding next year sale income in the current year. This decision to publish its directory one month early led to the recording of an increased $ Twenty eight million s of revenue in 2000 that would have otherwise been recorded in next year i.e., 2001.

According to FASB (Financial Accounting Standards Board) statement of Accounting concepts number five, among other factors, revenue must be recognized when it has been earned. By the above analysis it was clear that they are recognizing the revenue that had not yet been earned. Rather, the revenue for advertisements within that publication should have been recognized during the month, it was earned over the life of publication.

Also, they did not properly disclose their change in accounting method and its effect on net revenue in its financial statements. The entity attributed the revenue growth in 2000 to an increase in the number of directories that were published in current year. They neglected to disclose that it had published its Colorado directory twice in 2000, which will result to corresponding decline in revenue for the first quarter of coming accounting year i.e., 2001.