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Chapter 9. Goosing, Stuffing, and Faking... > Red Flag 6: Companies Bringing Forwa...

Red Flag 6: Companies Bringing Forward Revenue from Longer-Term Contracts

Companies will often push the envelope by booking a large proportion of revenue from a longer-term contract on signing, which has the potential to pump up earnings in the short term and risk a future setback. The reason that such a practice is dangerous is that the revenue is being taken early but some of the costs of servicing that contract will occur in subsequent years. Take, for example, a company that is leasing construction equipment and providing follow-up service as part of a five-year deal. If it pushes the entire revenue through its accounts in the first year, it could get an earnings boost because the offsetting costs will be only partial. However, in years two throughfive, it will face nothing but costs through its accounts while it pays staff to service the equipment, and its earnings could be hit as a result.


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