PAPERS ON INCOME

To Fulfill the Assignments of Accounting Theory Courses

Supporting lecturer:
Tiara Pradani, M,S.Ak.

Arranged by:
Nasya Farlianti Maghfira 203403179
Salwa Dhiya Ulhaq 203403181
Endah Lisna Handara 203403193
Widya Putri Yuniar 203403503
Nabila Sasa Hunafa 213403105

ACCOUNTING STUDY PROGRAM

FACULTY OF ECONOMICS AND BUSINESS
SILIWANGI UNIVERSITY
2023
 FOREWORD

First of all, the writer would like to thank Allah SWT, because of His blessings and
mercy, the paper entitled "income" can be completed on time.

This paper is one of the requirements to fulfill the assignment of Mrs. Tiara Pradani,
M,S.Ak., Lecturer in Accounting Theory Course. The author also thanks for all the guidance.

In completing this paper, the author faced many obstacles, but with the help of many
parties, all of these obstacles could be overcome. May Allah SWT give blessings to them. It
provides the intrinsic elements in the Happy Prince short story with detailed explanation.
Although this paper has many shortcomings in its structure and explanation, the author hopes
that it can be used as a reference for readers to understand the intrinsic elements of a short story.

Tasikmalaya, 11 February 2023

Writer

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 LIST OF CONTENTS

CHAPTER I .......................................................................................................................................... 1
INTRODUCTION ................................................................................................................................. 1
1.1 Background .................................................................................................................................. 1
1.2 Formulation Of The Problem .................................................................................................... 1
1.3 Purfose ......................................................................................................................................... 2
CHAPTER II ......................................................................................................................................... 3
THEORITICAL REVIEW ................................................................................................................... 3
Definition of Income .......................................................................................................................... 3
Income Characteristics ...................................................................................................................... 3
CHAPTER III ....................................................................................................................................... 4
DISCUSSION ........................................................................................................................................ 4
A. Nature Of Income ......................................................................................................................... 4
 Definition of Income ............................................................................................................... 4
 Classification of Income ......................................................................................................... 4
 The Income Process ................................................................................................................ 5
 Income Valuation ................................................................................................................... 5
 Income Measurement ............................................................................................................. 6
 Income Recognition ................................................................................................................ 7
B. The Concept Of Capital Maintenance .......................................................................................... 8
 Capital Maintenance .............................................................................................................. 8
 Fundamentals of Capital Finance .......................................................................................... 8
 Factors that Determine Fixed Capital Requirements ........................................................... 8
 Factors that Determine Working Capital Needs ................................................................... 9
 Difference Between Own Capital and Loan Capital ............................................................. 9
 Constant Purchasing Power Accounting ............................................................................. 10
 Services Provided By Financial Instruments ....................................................................... 11
 Financial Institutions And Short Term Loans For Business .............................................. 11
 Differences of View on Income ............................................................................................ 12

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 C. Revenue Recognition Revenue Quality, Revenue Management and fraud in financial
statements ........................................................................................................................................ 12
 Revenue Recognition ............................................................................................................ 12
 Revenue Quality ....................................................................................................................... 17
 Revenue Management .......................................................................................................... 19
 Fraud in Financial Statement .............................................................................................. 22
The Case of Capital Maintenance Case .............................................................................................. 28
A. Problem .................................................................................................................................... 28
B. Settlement ................................................................................................................................. 28
CHAPTER IV...................................................................................................................................... 32
CONCLUSION.................................................................................................................................... 32
BIBLIOGRAPHY ............................................................................................................................... 33

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 CHAPTER I

INTRODUCTION
1.1 Background
Accounting is needed in every company because accounting can handle the performance
and condition of the company being run, whether making a profit or experiencing a loss with
accounting we can obtain information that will be useful for the wearer, both external parties and
apprentices. Having information can also pay taxes to the government for social welfare. All
information related to a lot of income derived from company activities, because income is
something that is important in every company. Without income it is impossible to get income or
income. Revenue is income arising from company activities in other words called sales, fees,
interest, dividends, royalties and rent. According to PSAK No. 23 paragraph 6: Income is the
gross inflow of economic benefits arising from the normal activities of a company during a
period when the cash inflow results in an increase in equity that is not derived from capital
contributions. However, the concept of income cannot be clearly formulated in the accounting
literature because income is closely related to measurement, timing in the context of a double
bookkeeping system. The understanding of income can vary depending on the angle from which
this income is viewed. Basically there are two approaches to the concept of income that can be
found in the accounting literature, namely: a. An approach that focuses on the inflow of
activations arising from the company's operations. b. Approach An approach that focuses on the
creation of goods and services. Indonesian Accounting Association (IAI) (2004: 23.2) that
income is the gross inflow of economic benefits arising from the normal activities of a company
during a period when the inflow results in an increase in equity that does not come from a
contribution to an increase in capital.

1.2 Formulation Of The Problem

1. How nature of income ?
2. How the concept of capital maintenance ?
3. How revenue recognition, revenue quality, revenue management and fraud in financial
statement ?

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1.3 Purfose
1. To know nature of income.
2. To know the concept of capital maintenance.
3. To know revenue recognition, revenue quality, revenue management and fraud in
financial statement.

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 CHAPTER II

THEORITICAL REVIEW
Definition of Income
SFAC No. 6, FASB defines revenue as follows: ”Revenues are inflows or other enhancement of
an entity or settlements of its liabilities (or combination of both) from delevering or producing
goods, rendering services or other activities that constitute the entity's ongoing major or central
operations” .
Income Characteristics
the characteristics that make up the notion of income and profit. What constitutes the notion of
income are:
1. An inflow or increase in assets
2. Activities that represent a continuous main or central operation
3. Settlement, decrease, or reduction of obligations
4. An entity
. Company products
6. Product exchange
7. Bears several names or takes several forms
8. Resulting in an increase in equity

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 CHAPTER III

DISCUSSION

A. Nature Of Income
 Definition of Income
Revenue is very influential for the survival of the company, the more income earned, the
greater the company's ability to finance all expenses and activities to be carried out by the
company.

PSAK No. 23 on income states that " Revenue is the gross inflow of economic benefits
arising from the normal activities of the entity during the period if the inflow results in an
increase in equity that is not derived from contributions to capital investment".

Revenue is the main purpose of establishing a company. As a profit-oriented organization,

revenue has a very big role. Revenue is an important factor in the operation of a company,
because revenue will affect the level of profit that is expected to ensure the survival of the
company.

According to Harnanto (2019: 102) writes that revenue is "an increase or increase in assets
and a decrease or reduction in the company's liabilities which is a result of operating
activities or the provision of goods and services to the public or consumers in particular.

It can be concluded from the above definition that revenue is income obtained for services or
products provided by the company to customers in a company's operating activities to
increase the value of assets and reduce liabilities arising in the delivery of goods or services.

 Classification of Income
Kusnadi (2000: 19) states that income can be classified into two parts, namely:
a) Operating income
Operating income is income arising from the sale of products, merchandise or services in
a certain period in the context of the main activity or the main purpose of the company
which is directly related to the main business (operation) of the company concerned.
This income is normal in accordance with the objectives and business of the company
and occurs repeatedly as long as the company carries out its activities. Each company
has different operating income according to the type of business managed by the
company. One type of company operating income is revenue from sales. This sale is in
the form of sales of goods and sales of services which are the main objects and targets of
the company's main business. Sales can be divided into two forms, namely:
1. Gross sales are revenue from sales before returns, discounts, and sales commissions.

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 2. Net sales are total sales revenue minus deducting factors such as returns, discounts,
and commissions.

b) Non-operating income
Non-operating income is income obtained from side activities or not from the
company's main activities (outside the main business) which are incidental. This type
of income can be divided as follows:
1. Income obtained from the use of the company's assets or economic resources by
other parties, namely:
a. Interest is a charge for the use of cash or cash equivalents or amounts owed to
the entity;
b. Royalty is a charge for the use of the entity's long-term assets,
c. Dividends are distributions of profits to holders of equity investments in
proportion to their ownership of a particular capital pool.
2. Income derived from the sale of assets other than merchandise or production. The
separation or division of income that flows from various sources is very necessary
so that accuracy can be obtained in making decisions for external parties,
especially users of financial statements.

 The Income Process

There are concepts that are closely related to the income process, namely the concepts of the
earnings process and the income realization process.
1. Earnings Process
The earnings process is a concept about the occurrence of income. This concept is based
on the assumption that all operating events required in order to achieve results will
always contribute to the final result of income based on the comparison of costs incurred
before the company carried out production activities. The operating activities referred to
in the above definition are activities that include all stages of production, marketing and
collection of receivables.
2. Revenue Realization (Realization Process)
Realization of revenue (realization Process) is the process of revenue that is collected or
formed after the product is completed and sold on the sales contract. realization of
revenue (realization Process) starts from the last stage of production activities, namely
when goods or services are delivered or delivered to customers. If the sales contract
precedes the production of goods or services, then revenue cannot be said to have
occurred because the revenue collection process has not yet occurred.

 Income Valuation
Income based approaches value a business based upon the past, current, or expected future
cash flows of the business and the risk that the business will not produce the desired return.

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Estimating and valuing flows of income is done through a process called capitalization.
Capitalizing the income streams will produce a so-called present value. Risk is incorporated
into this valuation through a discounting process.

An applicable valuation formula will discount the present value of cash flows based upon the
probability that the firm will not achieve the desired cash flows in the future. The discount
rate uses many factors relevant to the individual firm that make the firms projections more or
less likely. Below are multiple income-based valuation approaches.

Issues with Income-Based Valuation Methods Generally :

Income-based valuation approaches depend on a number of criteria in valuing a firm, such as
a capitalization rate, risk-related discount factors, and the projection of future cash flows.
Capitalization rates are often determined from historical transactions, the market rate of
return, and other indefinite factors. Discount factors are based largely upon the perception of
risk and the identification of possible risk factors.

Various methods, such as the build-up method and CAPM, take into consideration the
systemic risk associated with investing in a firm. These methods, however, often do little to
account for the firm-specific risk. The projection of future cash flows is very imprecise and
rarely accurate due to the tenuous nature of startup operations. The usefulness of these
projections is further distorted when they are discounted to present value.

The income approach is a real estate valuation method that uses the income the property
generates to estimate fair value. It's calculated by dividing the net operating income by the
capitalization rate.

 Income Measurement

A simple definition of income measurement is the calculation of profit or loss. For an

accountant, income is what's left over after subtracting all of an organization's expenses.
This can get a little complicated, especially when dealing with the time value of money or
depreciation.

Income Measurement: Approaches

In order to measure income, there are main methods or approaches can be used: the operation
approach, activities approach, balance sheet approach.

1. The Transaction/Operation Approach

The transaction, or operation, approach is the most commonly-used approach. With this
approach, accounting is done during the course of operations. This means that profit or

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 loss from a given service line or product is booked right away. Additionally, it separates
out income from operations and any other external sources.

When the reporting period ends, say the end of a quarter, you had already booked the
cost basis for assets and liabilities when they were incurred. There's no need to try to go
back and figure out values in the past; they are already logged.
2. The Activities Approach
The activities approach is an assessment of an organization's activities, instead of the
transactions. In this way, it differs from the operations approach. Income is documented
when certain activities or events take place, not as a result of specific transactions. What
do we mean by activities?

In the activities approach, the following activities trigger the recording of income:

 Planning
 Purchasing
 Production
 Sales
This approach is similar to the transaction approach; the activities approach is a little
broader in scope, looking at an activity or event versus individual transactions.
3. The Balance Sheet Approach
We can assess net worth by the data in the balance sheet. An increase in assets results in
income, minus expenses, of course! The balance sheet approach looks at the balance
sheet to assess profit or loss. If we look at an accounting period, and ending assets are
higher than assets at the beginning (minus expenses), we have a profit.

 Income Recognition
In general, there are two revenue criteria that can be used as guidelines in revenue
recognition:
1. The revenue has been realized or can be realized.
Realization means that products or services have been exchanged for cash or claims to
cash. In other words, revenue will be recognized after there is certainty that it will be
realized, where the goods resulting from the exchange can be immediately converted into
cash or claims to receive cash.
2. Revenue has been received
Revenue is deemed to be received when a company has done all that it must do in order
to be considered entitled to the benefits represented by the revenue. Whether or not
revenue is received depends on whether or not the company has substantially completed
what it has to do to acquire the right to the revenue.

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B. The Concept Of Capital Maintenance
 Capital Maintenance
Capital financing is about defining the planning process to fit within the budget set for the
project. Assets with cash tlows are then maneuvered to project a period of one year prior
to the start of the actual projcct. The existing budget must be able to cover the entire
workings of the project for the specificd time period. Get all the into you need here.
Capital finance can be used to plan or address several ditferent platforms such as
replacement decisions toretain a common business entity. focus on existıng products or
changes for market expansion, new products and services. regulations, safety and
environmental issues or other major issues. changes that require large amounts of funds to
be used for a period of at least one year.
 Fundamentals of Capital Finance
The need to have the intormation to run a capital financing platform is important as it
altects the general direction the compay wants to take. for the near future. It will also
determine the direction and also how it will atfect the long term future of the company.
Since most projects are initiated on a capital financing allowance, there is a need to ensure
that the project is capable of delivering the desired results in the long term time frame.
Looks in the level of commitment of all departments within the entity. dedicating
resources to this plan only. leaving little room for consideration or other changes.
Decisions on asset purchases, workforce expansion and other complementary tools
required for forecasts made through eapital financing planning will ultumately be formed
once the financing IS regulated and approved.
 Factors that Determine Fixed Capital Requirements
Not all capital budgets stay the same. nor do they all fit right into a particular framework
where one budget fits all. There are several factors that play a decisive role in the fixed
capital that is ultimately required for any venture.
The following are some of the factors that can contribute in some way to the amount
required in a fixed capital framework:
The nature ot the business entity is one of the determining factors that will affect fixed
capital. Within the plattorm there are several smaller considerations to consider such as
the size of the business entity. The products to be handled. the type of production process
and perhaps other determinants that shape the smooth running of the business entity.
The size and commitment to the business idea is also something that will be formed based
on the available fixed capital. For some. this is not really a big deal as there will be room
for expansion considerations when the business ends up making a good percentage of
profits.

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 Meanwhile. for others. having a fixed capital budget that is too small will not make a
business entity worthy and worth considering. Therefore, fixed capital largely determines
the final position of the business entity.
The stages of business progress and the associatcd pace involved are also determined by
the fixed capital involved, this also applies to business entities that are very focused on
expansion which will bring in additional income for companies that require lower fixcd
capital compared to companies that are just starting their business ventures.
Ideally, fixed capital should be able to accommodate all stages of the business entity
without having to make compromises which in the end can affect the overall performance
and the projections that were prepared in advance.
 Factors that Determine Working Capital Needs
Generally described as current assets in a business entity, working capital will include all
shares, cash, debtors and anything else related to the company. Although this working
capital figure may vary from time to time, the calculation must be carried out as an
estimate to ensure there is always sufficient working capital for the smooth running of the
company or business entity.
The following are some of the factors that will determine or dictate the working capital
needed to ensure the business runs smoothly and optimally:
If the business entity is based on a product that requires several raw materials, the stock of
these materials must be available. Working capital must also consider that these materials
are always available and ready to use. This can only be facilitated properly if there is
proper working capital to be utilized when the stock of raw materials is running low.
The time frame it takes to actually produce the goods or services. Ensuring that the
methods used are cost effective and time effective will make working capital work more
than not.
Credit terms from suppliers also affect the working capital that must be in place to ensure
a balance is maintained even if the credit terms are not strictly complied with. Likewise,
the credit terms offered to customers also greatly affect the working capital platform. All
of these must be considered in relation to each other, thus ensuring the final working
capital calculation is appropriate and sufficient to deal with any situation as it unfolds.
The sales forecast for the month is also another element to consider, when drawing up a
working capital layout. Although only estimates and projections are given, the appropriate
amount of working capital can be estimated. Profit margins are also taken into account to
complete the estimate.
 Difference Between Own Capital and Loan Capital
There are some very clear differences between these two lines of capital supply, but they
are equally useful when viewing business entities materialize successfully. In a scenario

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 where the capital investment is provided by the business owners themselves it means there
is less paper work involved when comparisons are made to sources of borrowed capital.
Borrowed capital will require practice of justification and all that is required to
actuallyreceive some if not all of the initial amount requested. Also, in most cases, there
will be a need to provide some form of collateral against the loan capital requested. Other
features such as legal implications and documentation must be submitted before the
business can be checked for compliance and an estimate of success.
In terms of taxes, there are also many reliefs that can be enjoyed from both types of capital
giving styles; however the percentage of tax calculated will largely depend on the chosen
style of setting up the business.
The time frame that affects the final debut ofa business entity also determines the type of
capital available. If the capital is provided by the owner, then the time frame is easier and
faster to set. However if the capital comes from a loan source, then a delay might be
something to be expected, which could have a bad impact on the business, especially if the
launch timeframe has a degree of significance associated with it.
The interest rate that will be charged by borrowed capital can also be a negative element
that may necd to be avoided if the capital will put the business into debt. While it is
natural to pay such interest on the loan amount, the interest will eat into the profits made
from the business
 Constant Purchasing Power Accounting
There are many tools that can help business owners in terms of the financial element. One
such tool is the CPP, also known as constant purchasing power, which is an accounting
measure that effectively shows the effect of inflation on the value of money at any given
time. Historical costs are converted to current price values using the index reflected in the
consumer price index of the day also referred to as CP.
The following are some of the elements that contribute positively to the business through
the use of this method.
This method ideally adopts the same unit of measurement when accounting for any price
changes or fluctuations. This is very useful because it gives the business owner a better
understanding of the current position and value of an element in "real time".
With the help of constant purchasing power accounting tools, historical accounts are
continuously maintained and reports are prepared in addition. This will then facilitate the
calculation of gains and losses in actual purchasing power due to the monetary item being
held.
Comparative studies are made easier because purchasing power is done in units of
measurement and this then makes financial reviews or studies quite easy. The reliability of
information is also advantageous for those who make management decisions that
formulate plans and policies for the business and its future.

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 If there are other entities participating in the business arrangement, constant purchasing
power accounting tools will help ensure that the contributors of capital remain "know"
thereby keeping purchasing power within the limits of those shareholders. It should be
noted however that while these tools can be very helpful, they only deal with general
purchasing power and not in the actual changes that the value of individual items might
bear.
 Services Provided By Financial Instruments
Most of the financial instruments are designed to help any business in various issues
related to the actual functioning of the business entity. These may come in the form of
checks, drafts, bonds, stocks, notes, futures, options contracts and many others. These
various styles of documentation depict monetary value, which are legally enforceable and
binding. Act as a form of legal agreement between parties connected to a business entity
in one way or another in payment of money.
Most companies and businesses today understand customer sentiment, is the only element
that ultimately determines the more strategic steps a business takes. This focus on the
customer or consumer then creates the need to have factual financial information that can
assist in making decisions that will impact business metrics ranging from brand
positioning to other elements that seal customer loyalty.
All of these financial instruments ultimately aim to help create revenue generation and
cost saving formats that will increase the chances of a business entity to be more
successful. All services provided by various financial instruments are usually available or
selected because of their specific ability to facilitate any transaction or agreement between
the parties related to the business entity. The convenience of such documentation eases
the burden of actually dealing with real cash and makıng projections with the availability
of real cash at any given time.
All of these contractual obligations will ensure the delivery of financial commitments in
accordance with the agreement between the parties. Some of these financial instruments
may include listed and unlisted debt securities, listed equity securities, purchased loans,
financial assets in assistance for trading, accounts receivable and others, cash or cash
equivalents, trading liabilities, current bank loans and long term and many other similar
contributing elements.
 Financial Institutions And Short Term Loans For Business
Many businesses today require some form of assistance in terms of financial aspects, thus
creating the need to seek such assistance from sources which may include financial
institutions or other platforms where short term loans can be issued.
If the planned business entity has a very confident picture of its eventual success, which is
projected to prove in a short time, then the option of obtaining a short term loan only
becomes a more viable way to raise much needed funds.

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 This also applies to any business expansion plan that does not necessarily require a large
long-term funding commitment. Financial institutions are also an alternative that is quite
popularly sought when funds are needed for business or business expansion. The
relationship between the two parties is usually limited to the financial party providing the
funds without having to say directly how the funds will be used.
However when an application is submitted for the fund, an outline of the projected use is
usually presented to the financial institution and the extension of the short-term loan will
require that information for an assessment and requirement of the fund.
It should be noted that most short-term loans tend to incur higher interest costs which can
sometimes make paynments more difficult to complete. Therefore, although accessibility
to these funds is much easier when compared to other forms of financial assistance, the
fact remains that in most cases the interest charged is also relatively high.
 Differences of View on Income

Although it has been agreed that income is very important, there are different views
regarding income:
Balance Sheet View – Economic Approach :

"Income is the net increase in asset value in one period"

Profit and Loss View – Accounting/Transaction Approach :
“This view considers "the balance sheet as a list of items remaining after income is
generated from revenue - costs"

C. Revenue Recognition Revenue Quality, Revenue Management and fraud in financial

statements
 Revenue Recognition

a) The Meaning of ‘Revenue Recognition’

Revenue recognition is a generally accepted accounting principle (GAAP) that

determines the process and timing by which revenue is recorded and recognized as an
item in the financial statements. The revenue recognition principle states that revenue
should only be realized once the goods or services being purchased have been
delivered.

Revenue is at the heart of all business performance. Everything hinges on the

sale. As such, regulators know how tempting it is for companies to push the limits on

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 what qualifies as revenue, especially when not all revenue is collected when the work
is complete. For example, attorneys charge their clients in billable hours and present
the invoice after work is completed. Construction managers often bill clients on a
percentage-of-completion method.

The revenue recognition principle, a feature of accrual accounting, requires

that revenues are recognized on the income statement in the period when realized and
earned—not necessarily when cash is received. Realizable means that goods or
services have been received by the customer, but payment for the good or service is
expected later. Earned revenue accounts for goods or services that have been
provided or performed, respectively.

b) The Crucial Difference Between Cash and Revenue

The most important thing to realize here, particularly for SaaS companies, is
that cash isn’t revenue. We explain the difference in more detail in this post, but in
general, no matter when a customer's cash arrives in your bank account, you don’t
count it as revenue until you have delivered the product or service that it paid for. The
remaining balance should sit in your accounts as deferred revenue until you recognize
it since customers can ask for your cashback at any time if you haven’t yet delivered
the service.

For most companies—retail stores, for example—this is a subtle difference

since the product is delivered as soon as the customer pays for it. But for SaaS and
other business types, knowing when to record revenue is more difficult.

For most companies—retail stores for example—this is a subtle difference,

since the product is delivered as soon as the customer pays for it. But for SaaS and
other business types, knowing when to record revenue is more difficult.

c) When Revenue Recorded

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 So if you don’t record the revenue when the cash hits your bank account, when do
you record it? Revenue recognition depends on the timing and sequencing of the two
main events that make up any transaction:

 Delivering goods or services (the revenue-generating process); and

 Receiving payment for said product or service per outlined payment terms.

Both events are independent. Retail stores, for example, handle payment and product
delivery simultaneously, but for many businesses, one event frequently occurs before
the other.

d) Immediately Upon Receiving Payment

This is the simplest example of revenue recognition—you deliver the product or

service immediately upon purchase, and you record the revenue immediately.

Revenue for one-time purchases should be recognized immediately.

This is most common with one-time purchases, like buying groceries or one-time
software packages. Because the customer takes possession of the product
immediately, revenue can be realized on your income statement in the same
accounting period as payment was received.

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e) After Payment is Received

It’s also common practice for companies to wait to record revenue until they deliver
the product or service to customers. This should be familiar to most SaaS and
subscription-based businesses—the customer pays upfront for a fixed period (usually
a month or a year), and the service is delivered over that time period.

Even though the booking for the entire year is received upfront, revenue is recognized
equally across the 12-month period.

If you get paid to provide a service for a month or a year, but you receive the money
immediately, that payment should be gradually recognized as revenue. Each month
that you provide the service for the prescribed time means recognizing an equal
portion of that income until the service delivery period is complete.

f) Before Payment is Received

Last but not least, revenue can also be recorded after delivery of the product or
service but before payment is received.

Companies don’t need to wait until payment is collected to record it as revenue. This
is a key concept in accrual accounting and usually applies to service-based businesses

15
 like consultancies. A service performed in March, for example, should be realized on
March financial statements, even if a client pays for said service in May.

g) Common Revenue Recognition Examples

Traditional software companies :

Meet Company A, a software company selling an on-prem CRM package for

enterprise customers. Instead of running a SaaS product, Company A delivers their
software the traditional way - a one-time software package, installed on local
hardware run by the customer.

Say Company A releases a new version in January, and the new version costs $10,000
upfront. If a customer purchases and receives the software in January, the company
can book the sale and recognize all $10k of the revenue in the same month.

This is the simplest example of revenue recognition. Because the customer takes
possession of the software immediately and runs it on their own hardware, the seller
can recognize the revenue immediately. Retailers like grocery stores work the same
way—revenue is recognized upon delivery, when customers buy their groceries.

Even with this straightforward example, though, it’s still important to recognize the
difference between cash and revenue. That difference becomes more apparent in our
next example.

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 Revenue Quality

a) The Meaning of ‘Revenue Quality’

The quality of earnings refers to the proportion of income attributable to the

core operating activities of a business. Thus, if a business reports an increase in
profits due to improved sales or cost reductions, the quality of earnings is considered
to be high.

A company's quality of earnings is revealed by dismissing any anomalies,

accounting tricks, or one-time events that may skew the real bottom-line numbers on
performance. Once these are removed, the earnings that are derived from higher sales
or lower costs can be seen clearly. Even factors external to the company can affect an
evaluation of the quality of earnings. For example, during periods of high inflation,
quality of earnings is considered poor for many or most companies. Their sales
figures are inflated, too.

In general, earnings that are calculated conservatively are considered more

reliable than those calculated by aggressive accounting policies. Quality of earnings
can be eroded by accounting practices that hide poor sales or increased business risk.

b) Impact of Quality of Earnings (Revenue Quality) on Stock Prices

Investors like to see high-quality earnings, since these results tend to be repeated in
future periods and provide more cash flows for investors. Thus, entities that have
high-quality earnings are also more likely to have high stock prices. Conversely,
those entities reporting lower-quality earnings will not attract investors, resulting in
lower stock prices.

c) How Revenue Quality Works

There are many ways to gauge the quality of earnings by studying a

company's annual report.

17
 Analysts usually start at the top of the income statement and work their way
down. For instance, companies that report high sales growth may also show high
growth in credit sales. Analysts are wary of sales that are due only to loose credit
terms. (Changes in credit sales, or accounts receivable, can be found on the balance
sheet and cash flow statement.)

Working down the income statement, analysts then might look for variations
between operating cash flow and net income. A company that has a high net income
but negative cash flows from operations is achieving those apparent earnings
somewhere other than sales.

One-time adjustments to net income, also known as nonrecurring income or

expenses, are another red flag. For example, a company may decrease expenses in the
current year by refinancing all of its debt into a future balloon payment. This would
lower debt expense and increase net income for the current year while pushing the
repayment problem down the road. Naturally, long-term investors don't care for that
move.

d) Characteristics of High-Quality Earnings

A key characteristic of high-quality earnings is that the earnings are readily

repeatable over a series of reporting periods, rather than being earnings that are only
reported as the result of a one-time event. In addition, an organization should
routinely provide detailed reports regarding the sources of its earnings, and any
changes in the future trends of these sources. Another characteristic is that the
reporting entity engages in conservative accounting practices, so that all relevant
expenses are appropriately recognized in the correct period, and revenues are not
artificially inflated.

e) Example of Earnings Manipulation

A company can manipulate popular earnings measures such as earnings per

share and price-to-earnings ratio by buying back shares of its own stock, which

18
 reduces the number of shares outstanding. In this way, a company with declining net
income may be able to post earnings-per-share growth.

When earnings-per-share goes up, the price-to-earnings ratio goes down. That
should signal that the stock is undervalued. It doesn't, though, if the company changed
the number by simply repurchasing shares.

It is particularly worrisome when a company takes on additional debt to finance stock

repurchases. Companies might do this to artificially inflate the per-share price of their
stock by reducing the number of shares available for purchase on the open market,
thus giving the impression that the value of the stock has increased.

 Revenue Management

Revenue management is the application of a data-driven approach to predict

consumer behavior to maximize revenue. Companies use sophisticated computer systems
to analyze consumer behavior, forecast demand, adjust inventory, and adjust prices. Thus,
companies can sell products at the right price, time, package, and location. Revenue
management is popular in industries such as airlines, online retail and hotels. In such
industries, demand tends to fluctuate from period to period, perhaps even daily.

a) Revenue Management Objectives

The main goal of revenue management is to maximize revenue by

adjusting demand patterns. That way, companies can sell the right product to the
right customer at the right time and at the right price. The essence of this
discipline is understanding customer perceptions of product value and accurately
aligning product pricing, placement, and availability to each customer segment.
Revenue management attempts to optimize overall results through complex
processes of market segmentation, price discrimination (eg charging different
prices), and differentiating product packages.

b) Ways of Working Revenue Management

19
 Businesses face fluctuating and varied demands. Demand rises and falls
according to seasonal factors such as holidays. In addition, the volume of requests
and preferences also varies from time to time. For example, they might tolerate a
price during the holiday season but not others. Revenue management is steeped in
such patterns. Companies develop data-driven tactics and strategies. From this
data exploration, they then estimate aspects such as the number of orders, the
number of purchases, and inventory availability. The goal is to forecast demand
with greater precision. Then, the company develops responses to optimize those
requests. They adjust prices, discounts, profit margins, and product packages.

Typically, the areas that revenue management focuses on are:

1) Demand segmentation and forecasting

2) Development of the right pricing strategy
3) Inventory adjustment
4) Flexible marketing strategy development
5) Exploit the available marketing channels

c) Demand segmentation and forecasting

The company's first task is to understand the market. Companies explore

data to understand market characteristics, such as:

1) Purchase volumes
2) Buyer time
3) Buyer demographics such as age, gender, occupation and income
4) Buyer psychographics such as personality, values, opinions, attitudes,
interests, and lifestyle

Then, the company categorizes each customer into several small

segments and forecasts the demand for each segment. The company uses the

20
 results to adjust prices, inventory levels, and marketing tactics for each
segment. In this stage, the company also performs a price sensitivity analysis
to determine optimal price levels and marketing tactics.

d) Price optimization

The main objective of a pricing strategy is to anticipate customer value

and then set specific prices to reflect that value. The company may set prices
according to market conditions and demands. For example, they charge high
prices during the peak holiday season and low prices during the normal season.
Pricing is also dynamic. I mean, companies can adjust and react to changes in
demand at any time.

e) Adjust supplies

In this case, the company ensures that products are available when they
are requested. So, not only demand, they will also predict the optimal supply.
When they set a discounted price, for example, they will build inventory in
anticipation of an increase in sales volume.

f) Develop a flexible marketing strategy

Companies design tactics and marketing strategies to stimulate targeted

demand. Let's say, during the peak season, the company records low sales. The
marketing team then examines the source of the problem and develops
appropriate tactics.

g) Exploits available channels

Companies must adjust price optimization and marketing tactics across

various distribution channels. Different channels have different demand
characteristics. Likewise, the price sensitivity in each channel is often different.
For example, subscribers on conventional channels may be more sensitive than
online subscribers. By shopping online, customers can easily compare company

21
 product prices with competitors' prices without having to bear high costs (eg
transportation costs).

 Fraud in Financial Statement

Financial statement fraud is a white-collar crime usually committed by

management insiders to represent a company in a more favorable fiscal light. Fraudsters
are motivated by personal gain, such as performance-based compensation; to enhance the
company's reputation by misleading potential investors; or simply buy time until mistakes
and financial losses can be properly corrected.

Financial statement fraud is a crime of opportunity. Companies with lax internal

controls, manual accounting systems or leaders who are dishonest and overly aggressive
are more likely to fall victim. The key to fighting financial statement fraud is to prevent it
from ever happening. If it can't be prevented, then it's important to find it as soon as
possible.

What is Financial Statement Fraud?

Financial statement fraud is the intentional misrepresentation of a company's

financial statements, either through negligence or exaggeration, to create a more positive
impression of a company's financial position, performance and cash flows.

Usually committed by senior management, these crimes are usually a means to an

end. Motives for committing financial statement fraud include personal gain, maintaining
business, and maintaining status as a leader in the organization. Fraudsters seek to
increase the company's perceived value to make the stock appear more attractive to
investors, to get bank approval for loans and/or to justify generous salaries and bonuses
when compensation is tied to company performance.

Regardless of the motive, financial statement fraud causes problems with current
and potential investors and shareholders. This can result in large-scale reputational
damage as well as serious sanctions from regulators — for example, the US Securities
and Exchange Commission (SEC) — and even arrest.

22
a. Key Take aways

 Financial statement fraud is committed when people with access to financial

documents and information manipulate data to make the company appear more
successful.
 Warning signs for financial statement fraud are numerous and fall into four
categories: financial, behavioral, organizational and business.
 To detect fraud, have an auditor analyze the relationships between different
financial numbers and compare the ratios to years past or industry norms.
 The No. 1 way to prevent financial statement fraud is to have in place a system of
strong internal controls that enforce the segregation of duties so that no single
employee has authorization to view and alter all financial data. This can be
automated through an enterprise resource planning (ERP) system.

b. Types of Financial Statement Fraud

Business fraud comes in many forms, including bribery, kickbacks and payroll
fraud. When it comes to financial statement fraud, most cases involve
intentionally misrepresenting accounting so that share prices, financial data or
other valuation methods make a company seem more profitable. Wrongdoers
manipulate revenue, expenses, liabilities and assets to portray the company in a
more positive light. Here are some typical approaches:

 Overstating revenue a company can commit fraud by claiming money as

received before the goods or services have been delivered. This can be
done by prematurely recording future expected sales or uncertain sales. If
the company overstates its revenue, it creates a false picture of fiscal
health that may inflate its share price.

 Overstating revenue a company can commit fraud by claiming money as

received before the goods or services have been delivered. This can be
done by prematurely recording future expected sales or uncertain sales. If

23
 the company overstates its revenue, it creates a false picture of fiscal
health that may inflate its share price.
 Timing differences this one involves understating revenue in one
accounting period by creating a reserve that can be claimed in future, less
robust periods. Other forms of this type of fraud are posting sales before
they are made or prior to payment, reinvoicing past due accounts and
prebilling for future sales.
 Inflated net worth of assets this form of fraud occurs when a company
overstates assets by failing to apply a suitable depreciation schedule or
valuation reserve, such as an inventory reserve. This will result in
overestimated net income and retained earnings, which increase
shareholder equity.

 Concealment of liabilities or obligations concealment is a type of fraud

where liabilities or obligations are kept off the financial statements to
inflate equity, assets and/or net earnings. Examples of concealed liabilities
can include loans, warranties attached to sales and underreported health
benefits, salaries and vacation time. The easiest way to conceal liabilities
is to simply fail to record them.

c. Financial Report Fraud Detection

The primary responsibility for detecting fraudulent financial statements
rests with the company's management. Fraud prevention is most effective with a
strong team consisting of an audit committee made up of internal and external
auditors and a board of directors who govern ethics in the organization. Auditing
standards establish that the auditor has a responsibility to achieve reasonable
assurance that the financial statements are free from material misstatement due to
error or fraud. The auditor's responsibility is to identify, assess and respond
appropriately to fraud risk, using the many tools and techniques at their disposal.

Auditors look for troublesome relationships among financial data that

indicate a cause for deeper investigation. Investigating the relationship between

24
numbers in financial statements offers comprehensive insight into a company's
financial health. The cornerstone of financial analysis is understanding what the
relationship is between certain financial statement balances so that the auditor
recognizes when the amounts are wrong. For example, a healthy company tries to
maintain a consistent balance between assets and liabilities. Unexpected shifts
from historical norms could indicate that management is trying to hide something.
An increase in ratios can mean hidden liabilities; a downward shift could mean
the company is borrowing heavily to finance operations.

Another important ratio to note is sales versus cost of goods sold or

services sold (COGS). Usually, these numbers rise and fall together; the more
goods sold, the more materials and costs incurred to produce them. This direct
proportional relationship also applies to sales versus accounts receivable. As sales
increase, so do accounts receivable. When any of these numbers fall out of
proportion to one another, further investigation is required.

Such an analysis is called comparative ratio analysis, and helps the auditor
discover accounting irregularities by measuring the relationship between two
different financial statement amounts. The ratio is calculated from the current
year's figures, then compared with the previous year, other companies, industries
or economies. When significant changes occur from year to year or between
entities, a more detailed examination is required to help uncover potential fraud.

Another tool that fraud examiners use to interpret a company's position is

percentage analysis — vertical and horizontal. Vertical analysis examines the
relationship between items in one of the financial statements during one reporting
period. The relationship between components is expressed as a percentage that
can be compared between periods. Horizontal analysis analyzes the percentage
change in individual financial statement items from year to year. The first year is
considered base, and subsequent changes are calculated as a percentage of the
base period.

25
 Comparative analysis tools help investigators identify financial
inconsistencies, increasing the likelihood of detecting fraud.
d. 7 Tips to Prevent Financial Statement Fraud
While fraud detection and the ability to quickly spot warning signs of
fraud are helpful during and after fraud, companies must implement systems to
prevent financial statement fraud from occurring altogether. From accounting
software that segregates duties to the company values of integrity and the role of
honesty exemplified by top management, these seven prevention tips will help
pave the way for fraud and send the message to employees that honesty is the best
and only policy.
1. Institute strong internal controls
The first and most important step is to institute strong internal accounting
controls. Key to this is segregation of duties, which involves dividing
responsibility for bookkeeping, deposits, reporting and auditing between
different people to reduce the temptation and opportunities to commit fraud.
Keep unauthorized personnel out of the accounting system by using
passwords, lockouts and electronic access logs. Perform accounting
reconciliations on a regular basis to ensure that accounting system balances
match up with external sources, like banking statements and customer records.
These practices will help thwart attempts to commit fraud.
2. Perform periodic audits of financial statements
Companies should regularly test their financial statements for accuracy to
make sure their internal controls are effectively preventing fraud. A deep dive
into the financial information can surface weaknesses in the internal controls
that lead to corrective measures. When employees know an external auditor
will be reviewing their work, they are less likely to stray from the honest path.
3. Set a tone of honesty at the top
Employees look to leadership to learn what is acceptable at an organization,
morally and behaviorally. Management should lead by ethical example,
demonstrating the values they want to see replicated in the company culture.

26
 Starting with onboarding, train employees to recognize fraud, meet ethical and
legal standards and be aware of consequences for breaches in conduct.
4. Use enterprise resource planning (ERP) accounting software.
An ERP system automates accounting operations, streamlining accounts
receivable, accounts payable and cash management. The system enforces
segregation of duties and strict approval mechanisms, which help prevent
unauthorized transactions. Taking the human variable out of these processes
reduces the points of vulnerability where would-be fraudsters could wreak
havoc.
5. Establish an internal hotline/reporting system
According to the ACFE, in 2020 companies with hotlines detected fraud at a
much higher rate than those without (49% compared to 31%). Instituting a
formal fraud reporting system empowers all employees to participate in fraud
prevention. Making it anonymous eliminates the fear of reprisals that could
hold a potential whistleblower back from reporting malfeasance.
6. Don’t tie management bonuses and compensation to short term goals
Performance-based pay can have dangerous outcomes, including incentivizing
fraud. According to the Academy of Management, people with unmet goals
were more likely to engage in unethical behavior than people attempting to do
their best. When leaders care more about looking good on paper than creating
value over the long term, illegal means to better performance, including
falsified financial statements, can seem like an appealing pathway to
“success.”
7. Follow up on gut instincts
Notice if something feels off about the company’s financial statements and
follow up with a deeper inquiry. If communications with key accounting
personnel are vague or misleading, something may be amiss.

27
The Case of Capital Maintenance Case
A. Problem
Income of Fishermen Catching Fish During Covid-19 (Case Study in Air Bangis
District, West Pasaman Regency).
The existence of uncertain conditions and high concerns related to health occur in
the social life of the community, including fishing communities. The COVID-19 factor is
believed to affect fishermen's income. The impact of the COVID-19 pandemic that is
most felt by fishermen is the price of fish which has dropped drastically by up to 50%.
This is not comparable to the effort and operational costs incurred by fishermen when
fishing at sea. (Kholis et al, 2020).

B. Settlement
To calculate income using the formula (Soekartawi, 1995).
P = TR-TC
Description:
P = Income (Rupiah/month)
TR = Income (Rupiah)
TC = Total cost (Rupiah/month)
Furthermore, the analysis of household expenditure can be calculated through the food
and non-food expenditure formula. (jamaliah, 2011).
TP = Pp + Pn
Description:
TP = Total
al Fishermen household expenditure (Rupiah)/month
P = Food expenditure (Rupiah)/month
P = Non-food expenditure (Rupiah)/month

A) Income Condition Before Covid-19.

Simultaneously the variables of working capital, experience, technology, mileage
and education have a significant and positive relationship to fishermen's income. And
partially working capital, experience, technology, mileage have a significant and
positive relationship while the education variable has no significant but positive effect

28
 on fishermen's income. According to Rahman et al, 2016, wages or income received
by fishermen's water is the difference between the results of selling fish with fishing
costs actually incurred both per trip and per month. Fishermen's income from research
results at fishing locations according to the type of fish caught can be described in the
following table.

Of the number of catches, the total average income of fishermen is Rp.

1.115.138,- For transportation costs of Rp. 333,833.33, - and for logistics costs Rp.
45,833.33,. So, the average number of costs incurred by fishermen per month is
Rp.463,457.93. formed when the fish is landed. Fishing business income is obtained
from the amount of production of each fish multiplied by the average price of fish,
where fisheries management policies have not reached the interests of the group.
Several cases found in the field indicate that small-scale fishermen have experienced
productivity stagnation. This low productivity results in fishermen's income not
being able to meet their business and household needs in the long term. The income
of Air Bangis fishermen according to the type of fishing gear used can be described
in the following table:

B) Income Conditions After the Covid-19 Pandemic.

Explicitly, the results of the study illustrate that fishermen's income before the
COVID-19 pandemic appeared stable, but with the implementation of the PSBB
(Large-Scale Social Restrictions) regulations, this has caused a very drastic change in
the economic income level of fishermen in the Air Bangis sub-district, Pasaman
Regency. West. Prediction results for the average income of fishermen before the

29
pandemic and during the COVID-19 pandemic until 2020 showed a significant
decline. From the number of fish caught, the value of income also decreases. Of the
total number of fish caught in March, as many as 453,692 tons resulted in a rupiah
value of Rp. 7,119,185,880,-, in April 381,822 tons, the rupiah value was Rp.
6,657,631,720,-, in May 120,876 tons produced a rupiah value of Rp. 2,125,665,776,-
and in June it amounted to 277,067 tonnes producing a rupiah value of Rp.
4,487,467,032,-. The results of interviews with respondents that the decrease in
catches was caused by the small amount of production and the low buying and selling
of fish to consumers. The low buying and selling of fish by consumers is because
consumers avoid direct contact with strangers which is a form of prevention of
transmission of the Covid-19 virus, including fishermen and fish traders.

From the description of the table above, the income of fishermen from March to
June 2021 during the Covid-19 period averaged Rp. 1,912,753.- or Rp. 478,188.- per
month. This is very complaining about the fishermen in meeting the daily needs of
their families. Factors that affect fishermen's income are fishing experience, weather
conditions and catches in addition to the enactment of PSBB policy regulations by the
central to regional governments. Based on the findings of researchers in the field, the
decrease in the number of catches of fishermen in Air Bangis is also due to changes in
weather and the arrival of the holy month Ramadan in addition to the spread of the
Covid-19 virus. The volume of rain which was quite high and accompanied by

30
 hurricane winds resulted in fishermen being unable to operate. These weather
conditions occur from April to June. With the scheme of erratic weather conditions
resulting in high sea waves up to 4 m. Heavy rain accompanied by lightning occurred
in the afternoon until the evening. According to Khafianur et al, 2016, when high
waves occur, fishermen do not carry out fishing activities, on the contrary, the sea
waves are stable, the results obtained tend to increase (high). The conclusions
obtained from this study: (1) High waves occur from November to January, in those
months fishermen tend not to go to sea. (2) In December it was known that the
catches obtained were very low or even non-existent. (3) The highest catches are
obtained from March to June, (4) High waves greatly affect the catches obtained by
fishermen.
C) Conclusion
From the results of the study it was found that during the Covid-19 disaster which
also hit fishermen in West Pasaman Regency, to be precise, the Air Bangis area had a
relative effect on fishing activities. Catches can be seen decreasing from March to
June 2020. The decrease in catches has also decreased fishermen's income, this is also
due to unfavorable weather factors, conditions entering the holy month of Ramadan
and the global government's ban on enforcing SPBB regulations in West Pasaman
itself The income of catching fishermen per month is very small compared to the
period before Covid-19, which was Rp. 478,188, - whereas before the Covid-19
fishermen's income was around Rp. 100,000-Rp. 250,000 per catch every day, up to
Rp. 1,000,000 to Rp. 2,500,000. The lowest expenditure of Rp. 1,000,000 to Rp.
2,000,000 per month and the highest expenditure is Rp. 3,100.00 to Rp. 4,000,000
more per month based on the level of need and the number of dependent family
members. The role of the government itself has not had a lot of influence on the
decline in fishermen's income during the Covid-19 period, with the distribution of
independent cash assistance to fishing communities, which was not yet a solution to
meet the needs of fishing communities themselves. It can be explained that during the
Covid-19 pandemic it also had a very bad impact on the income and economy of
fishermen.

31
 CHAPTER IV

CONCLUSION

Revenue is defined as an increase in assets rather than an increase in net equity although
the increase in assets will eventually result in an increase in net equity. So the incoming assets
are called income. Hence the increase in assets due to income. So, an increase in equity is a
consequence not a source of income, so income cannot be defined as an increase in equity.

With the realization concept, new revenue can be said to occur or be formed when there
is an agreement or contract with an independent party (buyer) to pay for the product, whether the
product has been completed and delivered or or has not been made at all. Based on the concept,
actual revenue occurs as a result of certain transactions, namely sales transactions or contracts, so
that before the transaction or contract occurs, revenue has not been generated or generated.

32
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