Kendall Square Case Analysis

1. According to GAAP, revenue is recognizable when realized or realizable, and when it is earned. Companies must demonstrate that an arrangement exists with the buyer before even considering the idea of recognizing revenue. Once an agreement is made, revenue can be recognized if delivery has occurred, fees are fixed or determinable, and collectability is probable.

a. No

b. No

c. No

Kendal Square Research Corporation is prematurely recognizing all aspects of revenue. They are not matching the costs and expenses to revenue, instead they are basing recognition on the assumption that payment will be received.

2. Management will need to take a more conservative approach to revenue recognition if they wish to expand their business. While premature revenue recognition can help a company in the short-term, it will hurt them in the long run. Although it takes longer to boost revenue in the first few years of business, it can all fall apart overnight if the methods of recognition are not in line with GAAP. The company must have their operating practices and accounting principles aligned. In this case KSR states in its note 1: "The Company recognizes revenue from product sales upon written customer acceptance. Warranty costs are accrued as product sales revenue is recognized" (University Readers 211). But in practice KSR was shipping ordered equipment to clients who had no prospective funding, or those who didn't receive grants yet. This is not good business, and could be the cause of KSR's subsequent bankruptcy. That should do it. Continuing to pursue revenue recognition will prove futile.