An article titled “SEC Broadens Investigation in Revenue-Boosting Tricks; Fearing Bogus Numbers Are Widespread, Agency Probes Lucent and Others,” by Susan Pulliam and Rebecca Blumenstein, appeared in the May 16, 2002, Wall Street Journal.

Instructions Read this article and answer the following questions.

(a) The article predicts that, “Probing revenue promises to be a much broader inquiry than the earlier investigations of Enron and other companies accused of using accounting tricks to boost their profits.”

What is the difference between inflating profits and inflating revenues?

(b) What are the ways in which accounting information is used (both in general and in ways specifically cited in this article)? What are the concerns about using accounting information that has been manipulated to increase revenues? To increase profits?

(c) Describe the specific techniques that may be used to inflate revenues that are enumerated in this article.

Why would a practice of inflating revenues be of particular concern during the “dot-com boom”?

(d) The article says that L90 Inc. “lopped $8.3 million, or just over 10%, off revenue previously reported for 2000 and 2001,” while booking the $250,000 net difference in the amount of wire transfers that had been used in one of these transactions as “Other income” rather than revenue. What is the difference between revenues and other income? Where might these items be found in a multi-step income statement? In a single-step income statement?

(e) What are “vendor allowances”? How might these allowances be used to inflate revenues? Consider the case of Lucent Technologies described in the article. Might Lucent’s techniques also have been used to boost profits?