Chapter 18

Accounting in Action: CM2

This morning before going to work,you read in the paper about a company that the SEC is investigating for improper revenue recognition. It is not clear from the article what industry this company is in, but you start to wonder about the specific recognition policies at CM2. You know that CM2 sells a product and a service, and you are aware that its service contracts extend over variable lengths of time, but you are unsure whether it includes upgrades in the sale price of its products.

When you arrive, you find Conner and Martin and ask how CM2 recognizes revenue. They indicate that there is only one way to record revenue for a product and that is when the company ships the product. For an individual service call, CM2 recognizes revenue when the service technician leaves the company premises to provide the service to the customer. They are not quite sure how the revenue from service contracts is recognized.


(a) Prepare a brief memo describing the various revenue recognition methods acceptable for CM2. Recall that it sells products (with possible upgrades included in the sale price), provides service on demand for customers, and has service contracts that guarantee customers service over a specified period of time. Also recall the “product” contains both software and hardware and that each may be sold separately or as a package. Access the FASB Accounting Standards Codification to provide authoritative support for the position articulated in your memo for each of these categories.

(b) Access the 2012 10-K for Microsoft, Inc. within the SEC website ( Examine Microsoft’s Significant Accounting Policies (usually found in footnote 1). Write a memo to Conner and Martin describing Microsoft’s revenue recognition policies, so that they will have a better understanding of the issues faced by a firm in the software industry.