Analyzing Revenue

Five Steps Revenue Recognition Standards

The first step is to identify the contract with the customer. There is a need to agree
between two or more parties stating the terms of agreement and the rights and obligations. It can
either be written or oral based on the agreement that the two parties consider fit for them (Young,
Cohen, and Bens, 2019). The second step is to identify the performance obligations in the
contract. In the second phase, the primary intention is to realize the roles and objectives of each
individual. Thirdly, there is the creation of the transaction price. It is the amount to which the
entity expects to be entitled to the service and products that have been offered. The fourth step is
to allocate the transaction price to the performance obligation. In this stage, an evaluation is done
to ensure that each party’s roles and responsibilities are worth the cost that has been allocated
(Young, Cohen, and Bens, 2019). Lastly, there is the recognition of revenue as the fifth stage.
The step can only be accomplished if there is successful deliberation of the performance
recognition and a transfer of the goods and services to the consumers.

Examples

A review of the Starbucks form 10-k depicts how they apply the five steps of revenue
recognition. For example, the revenue in Starbuck is recognized based on redemption and not
when the cash has been loaded onto them (Starbucks Corporation, 2019). The organization’s
approach effectively adheres to the steps of revenue recognition standards. From the examples,
the various seasonal implications will have on the consolidated statements of earnings will be
minimal and less pronounced. Another example is that is the vendors of suppliers fail to meet the
standards of the product that have been set by Starbucks, which needs to be timely and efficient
is beyond their control. Therefore, there is the application of the five steps revenue recognition

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standards where they enter into a contract agreement with their suppliers. In the process, only the
deliveries and supplies that have been successful will be incorporated into the books of accounts
(Starbucks Corporation, 2019). Their business and profitability are at risk, especially for
products with a limited number of suppliers and vendors. They cannot be easily replaced if there
is a delay, and their brand will be affected in the encounter. Avoiding such encounters has been
made possible with the revenue recognition approach being applied in their operations.

Financial Statement Fraud

Fraud in the books of accounts takes many forms, including omission. However, from the
five steps of revenue recognition standards, recording is the primary way fraudulent activities
can be conducted. In the case of Starbuck, an individual can make a recording in the books of
accounts for an amount that has not been paid. However, how the organization applies the
standards will make it hard for such an event to occur (Carmichael, 2019). Only the payments
that have been made through the contract are the ones recognized in the books of account.
Therefore, recording and embezzling the funds later when the payment is made will be a
challenging process. There is an agreement between the suppliers, consumers, and vendors. On
such an occasion, it will not be possible to set the prices that were not agreed upon. The end goal
will be to create transparency in some of the operations occurring either at the moment or in the
future.

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References

Carmichael, D. (2019). New revenue recognition guidance and the potential for fraud and abuse.
The CPA Journal, 36-43.
Starbucks Corporation. (2019). Sec 10K.
https://www.sec.gov/Archives/edgar/data/829224/000082922415000038/sbux-
9272015x10k.htm.
Young, D., Cohen, J. & Bens, D. (2019). Corporate financial reporting and analysis. Wiley.