The following is a true case. General Electric (GE), like many other large corporations, is scrutinized by financial analysts who develop quarterly forecast EPS figures for the company. The companies are under intense pressure to meet or exceed these EPS forecasts. But when earnings fall short, some companies resort to accounting tricks. A few years ago, GE found itself facing this problem. In one case, it “sold” six locomotive engines to a financial institution at year-end with the idea that the financial institution would resell them to GE’s regular railroad customers in the first quarter of the following year. GE booked the revenue at year-end, which helped it hit its forecast EPS numbers. Later, upon investigation by the SEC, the transaction was found to be a “sham,” or phony transaction, because the financial institutions were not taking over full ownership of the engines. In early 2009, GE was fined $50,000,000 for misrepresenting its financial results.

Requirements

1. What are the criteria for recording a sale of goods?

2. Why do company managers feel pressure to meet or exceed EPS forecasts of outside analysts?