Lucent Case
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Lucent Technologies, Inc.—Revenue Recognition
Lucent Technologies designs and delivers networks for the world’s largest communications service providers. Backed by Bell Labs research and development, Lucent relies on its strengths in mobility, optical, data and voice networking technologies as well as software and services to develop next-generation networks. The company’s systems, services and software are designed to help customers quickly deploy and better manage their networks and create new, revenue-generating services that help businesses and consumers. As of December 31, 2002, Lucent employed approximately 40,000 people worldwide (two years prior, the figure was close to 123,000). Lucent is listed on the New York Stock Exchange under the symbol LU. (Source: Company 2002 Form 10-K)
Learning Objectives • Define revenues and gains. Explain the difference between the two. • Critically assess the revenue recognition policies of a particular company. • Consider the trade-offs between rules-based and principles-based accounting standards. • Understand the role of audit committees in corporate governance and financial reporting. • Explain how financial statement users can evaluate the quality of a company’s reported revenue. Refer to the 2002 financial statements of Lucent Technologies, Inc. Concepts
a. In your own words, define “revenues.” Explain how revenues are different from “gains.” b. Describe what it means for a business to “recognize” revenues. What specific accounts and financial statements are affected by the process of revenue recognition? c. When does Lucent recognize revenues? d. In general, what incentives do company managers have to make self-serving revenue recognition choices?
Process
e. Assume that all of Lucent’s sales revenue is “on account.” Prepare a journal entry that summarizes the sales activity for fiscal 2002. f. Consider the following hypothetical revenue recognition scenarios and
Lucent Technologies, Inc.—Revenue Recognition
Lucent Technologies designs and delivers networks for the world’s largest communications service providers. Backed by Bell Labs research and development, Lucent relies on its strengths in mobility, optical, data and voice networking technologies as well as software and services to develop next-generation networks. The company’s systems, services and software are designed to help customers quickly deploy and better manage their networks and create new, revenue-generating services that help businesses and consumers. As of December 31, 2002, Lucent employed approximately 40,000 people worldwide (two years prior, the figure was close to 123,000). Lucent is listed on the New York Stock Exchange under the symbol LU. (Source: Company 2002 Form 10-K)
Learning Objectives • Define revenues and gains. Explain the difference between the two. • Critically assess the revenue recognition policies of a particular company. • Consider the trade-offs between rules-based and principles-based accounting standards. • Understand the role of audit committees in corporate governance and financial reporting. • Explain how financial statement users can evaluate the quality of a company’s reported revenue. Refer to the 2002 financial statements of Lucent Technologies, Inc. Concepts
a. In your own words, define “revenues.” Explain how revenues are different from “gains.” b. Describe what it means for a business to “recognize” revenues. What specific accounts and financial statements are affected by the process of revenue recognition? c. When does Lucent recognize revenues? d. In general, what incentives do company managers have to make self-serving revenue recognition choices?
Process
e. Assume that all of Lucent’s sales revenue is “on account.” Prepare a journal entry that summarizes the sales activity for fiscal 2002. f. Consider the following hypothetical revenue recognition scenarios and