Question

Financial Statement Analysis Case

Westinghouse Electric Corporation

The following note appears in the “Summary of Significant Accounting Policies” section of the Annual Report of Westinghouse Electric Corporation.

Note 1 (in part): Revenue Recognition. Sales are primarily recorded as products are shipped and services are rendered. The percentage of-completion method of accounting is used for nuclear steam supply system orders with delivery schedules generally in excess of five years and for certain construction projects where this method of accounting is consistent with industry practice.

WFSI revenues are generally recognized on the accrual method. When accounts become delinquent for more than two payment periods, usually 60 days, income is recognized only as payments are received. Such delinquent accounts for which no payments are received in the current month, and other accounts on which income is not being recognized because the receipt of either principal or interest is questionable, are classified as non-earning receivables.

Instructions

(a) Identify the revenue recognition methods used by Westinghouse Electric as discussed in its note on significant accounting policies.

(b) Under what conditions are the revenue recognition methods identified in the first paragraph of Westinghouse’s note above acceptable?

(c) From the information provided in the second paragraph of Westinghouse’s note, identify the type of operation being described and defend the acceptability of the revenue recognition method.

Short answer

1. The business entity uses a different method of revenue recognition for the sale of products, providing services, long-term contracts, and WFSI revenue.
2. Different revenue recognition techniques are acceptable under different situations and conditions.
3. The business entity first recognizes interest as well as principal on receipt of each payment but when the account is declared delinquent the business entity uses the cost recovery method.

Step-by-step solution

Definition of Revenue Recognition

Revenue recognition can be defined as the principle that will be used while determining the amount of recognized revenue. It states the conditions and situations under which the business entity must recognize the revenue

Revenue recognition method used

1. When any product is sold the business entity uses the point of sale and date of delivery for recognizing revenue.
2. When services are rendered the business entity recognizes revenue on completion of service or by using the billable method.
3. The business entity uses a percentage-of-completion method for recognizing revenue for the nuclear steam supply and for long-term contracts.
4. Revenue for WFSI will be recognized using the accrual method of accounting

Step 3:Conditions under which the first paragraph is acceptable

1. Point of sale will be acceptable under the situation when the seller completed its obligation of transferring the product and its earning process is complete.
2. For any service transaction the business entity will recognize the revenue when the service is rendered to the customer.
3. The percentage-of-completion method will be accepted when the business entity is working on a long-term project.

Type of operation employed and justification for use of revenue recognition method

WFSI is wholly owned by Westinghouse. This subsidiary company provides finance to the customers of Westinghouse by accepting notes payable from the customers. WFSI generates revenue from the interest charged on the notes payable. As long as the account is currently the business entity reports receipt of both interest and principal as each payment is received.

When a customer misses two payments then an account of such customer will be declared as delinquent and the business entity then uses the cost recovery method. Under this method, the business entity does not accrue revenue until the principal amount is recovered.