The purpose of this assignment is to apply accounting revenue recognition concepts in a case study.
Read the article “Revenue Recognition Guidance and the Potential for Fraud and Abuse,” located in the Topic resources. In addition, refer to the Starbucks Financial Data – SEC Filings, Form 10-K for the most recent fiscal year and locate the note on revenue recognition in the notes to the financial statements. Provide a 500- to 750-word paper addressing the following items:
Summarize the five-step revenue recognition standards as presented in Chapter 4 of the textbook.
Refer to the Starbucks Form 10-K and provide examples of how Starbucks follows the five-step revenue recognition model.
Refer to the article “Revenue Recognition Guidance and the Potential for Fraud and Abuse” and discuss how the five-step revenue recognition model may prevent Starbucks from committing financial statement fraud. Provide examples to support your points. Note in the article that there are subheadings for “Fraud and Abuses” and “Implications of New Guidance;” these may provide some helpful ideas for this portion of the assignment.
Name the Microsoft Word document “LastnameFirstinitial.ACC502.T2.”
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In this assignment, we will be applying the revenue recognition concepts of accounting in a case study. Specifically, we will be analyzing how Starbucks follows the five-step revenue recognition model and how this model may prevent the company from committing financial statement fraud. Additionally, we will refer to an article titled “Revenue Recognition Guidance and the Potential for Fraud and Abuse” to support our analysis.
The five-step revenue recognition standards, as presented in Chapter 4 of the textbook, provide a framework for companies to recognize revenue appropriately. These steps are as follows:
1. Identify the contract with the customer: This step involves determining whether a contract exists between the company and the customer. The contract should be legally enforceable and contain specific rights and obligations for both parties.
2. Identify the performance obligations in the contract: Once a contract is identified, companies must determine the specific goods or services that they are obligated to provide to the customer. These performance obligations should be distinct and separately identifiable.
3. Determine the transaction price: The transaction price is the amount that the company expects to receive in exchange for providing the goods or services. It includes any variable consideration, such as discounts or refunds, which must be estimated using either the expected value or the most likely amount approach.
4. Allocate the transaction price to the performance obligations: The transaction price should be allocated to each performance obligation based on its standalone selling price. If the standalone selling price is not observable, estimation techniques like the expected cost plus margin or the adjusted market assessment can be used.
5. Recognize revenue when or as the entity satisfies a performance obligation: Revenue is recognized when the company satisfies each performance obligation by transferring control of the goods or services to the customer. This can occur over time or at a point in time, depending on the nature of the performance obligation.
When analyzing the Starbucks Form 10-K, we can see how the company follows the five-step revenue recognition model. For example, in the notes to the financial statements, Starbucks provides detailed information on its revenue recognition policies and practices. The company identifies its contracts with customers, such as agreements for the sale of coffee and related products. It also explains the performance obligations it has, such as delivering the products to the customers’ designated locations.
Moreover, Starbucks discloses its transaction prices, including any discounts or incentives offered to customers. The company allocates the transaction price to each performance obligation, considering factors like the standalone selling price of the products. Finally, Starbucks recognizes revenue once it satisfies the performance obligations by transferring control of the products to the customers.
Referring to the article “Revenue Recognition Guidance and the Potential for Fraud and Abuse,” the five-step revenue recognition model helps prevent Starbucks from committing financial statement fraud by increasing transparency and accuracy in reporting revenues. The model requires companies to clearly identify contracts and performance obligations, ensuring that revenue is recognized only when these obligations are met.
For example, by following the model, Starbucks cannot manipulate revenues by recognizing them before products are delivered or services are provided. The model’s emphasis on transferring control of goods or services to customers prevents premature recognition and ensures that revenue is recognized when Starbucks fulfills its obligations.
Additionally, the model’s requirement to allocate the transaction price based on standalone selling prices prevents companies like Starbucks from manipulating revenue figures through discounting or bundling strategies. By using observable selling prices, revenue recognition becomes more objective and less susceptible to manipulation or abuse.
In conclusion, Starbucks adheres to the five-step revenue recognition model in its financial reporting, ensuring transparency and accuracy. This model helps prevent financial statement fraud by requiring clear identification of contracts and performance obligations and by recognizing revenue only when control is transferred. By allocating transaction prices based on standalone selling prices, manipulation through discounting strategies is also minimized. Overall, the application of the five-step revenue recognition model strengthens the integrity of Starbucks’ financial statements.