Refer to the description in the text of the revenue recognition procedures used by Merck-Medco. Merck recognized revenue for the prescription drug copayments paid to the pharmacy.
a. Why did Merck choose this method to recognize revenue? What impact did this choice have on the financial statements?
b. If shareholders or lenders reviewed the Merck financial statements, what conclusion would these outsiders reach about the company?
c. Evaluate the quality of information given to outsiders based on Merck’s revenue recognition policy. Determine whether the information is:
• Relevant
• Reliable
• Verifiable
• Neutral
• Free from bias
d. Did the revenue reported “faithfully represent what it claims to represent”?
Explain your answer.