In this chapter, you learned the three conditions that must be met before revenue can be recognized. In any organization, there is always a risk that fictitious revenue may be recorded before it is earned.

Assume that you are a sales clerk in a shoe store. Your job is to sell products to prospective customers; once they are sold, you enter the transaction in the cash register. The selling price of all shoes to be sold is preprogrammed in the register by head office. The transactions recorded in the cash register provide the basis on which revenue is recorded in the accounting records. A sale is not processed and recorded until payment (whether by cash, debit card, or credit card) is appropriately authorized. You are paid a weekly salary and a percentage commission based on the sales that you have personally made.

Instructions

(a) When does the shoe store record revenue? How is each condition of revenue recognition met before revenue is recorded?

(b) What would be your incentive to overstate the recording of revenues?

(c) How is the shoe store preventing you from overstating revenues?