In recent years, the Securities and Exchange Commission (SEC) has been waging a public campaign against corporate accounting practices that manage or manipulate earnings to meet the expectations of Wall Street analysts. Corporations engage in such practices in the hope of avoiding shortfalls that might cause serious declines in their stock price. For each of the following cases that the SEC challenged, tell why each is a violation of the matching rule and how it should be accounted for:

a. Lucent Technologies sold telecommunications equipment to companies from which there was no reasonable expectation of payment because of the companies’ poor financial condition.

b. America Online (AOL) recorded advertising as an asset rather than as an expense.

c. Eclipsys recorded software contracts as revenue even though it had not yet rendered the services.

d. KnowledgeWare recorded revenue from sales of software even though it told customers they did not have to pay until they had the software.

Interpreting Financial Reports Application of Accrual Accounting