Massive Income

Recognition, Measurement, and Reporting

Analyzing the profitability of a company depends on obtaining information about the profit reported by the company.A lot of judgment may go on behind the scenes to reach that number. The Financial Accounting Standards Board (FASB) guides that judgment with its pronouncements (FASB Statements) and a conceptual body of literature known as Statements of Financial Accounting Concepts. The theory in these concept statements provides guidance concerning three main issues related to what amount of profits to report: recognition, measurement, and reporting.

Recognition
Numbers are in the financial statements because someone made a journal entry. The journal entry results when someone decides there is an amount (or several amounts) that must be recorded to represent a transaction. In some cases, many assumptions and estimates must be made to reach that number.When that number is recorded, an economic transaction is recognized. The issue of revenue recognition will be discussed further later in the chapter.