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They used a few different Accounting methods. The Following explains each one and how the
company used it.
Revenue recognition
Revenue recognition provides a meaningful and consistent measurement of business
performance. In recurring revenue, it is important to match the revenue and the costs incurred
to generate that revenue in the same period, regardless of when the sellers invoice is issued or
the customers payment is received. The revenue recognition principle is a cornerstone
of accrual accounting together with the matching principle. They both determine the accounting
period, in which revenues and expenses are recognized. According to the principle, revenues are
recognized when they are realized or realizable, and are earned (usually when goods are
transferred or services rendered), no matter when cash is received. In cash accounting in
contrast revenues are recognized when cash is received no matter when goods or services are
sold.
Cash can be received in an earlier or later period than obligations are met (when goods or
services are delivered) and related revenues are recognized that results in the following two
types of accounts:
Mark-to-Market Accounting
Mark-to-market (MTM or M2M) or fair value accounting refers to accounting for the "fair
value" of an asset or liability based on the current market price, or for similar assets and
liabilities, or based on another objectively assessed "fair" value.
Fair value accounting has been a part of Generally Accepted Accounting Principles (GAAP) in the
United States since the early 1990s, and is now regarded as the "gold standard" in some circles,
even though it is considered to be one of the reasons of the Enron scandal and the eventual
bankruptcy of the company and the closure of the accounting firm Arthur Andersen.
Mark-to-market accounting can change values on the balance sheet as market conditions
change. In contrast, historical cost accounting, based on the past transactions, is simpler, more
stable, and easier to perform, but does not represent current market value. It summarizes past
transactions instead. Mark-to-market accounting can become volatile if market prices fluctuate
greatly or change unpredictably. Buyers and sellers may claim a number of specific instances
when this is the case, including inability to value the future income and expenses both accurately
and collectively, often due to unreliable information, or over-optimistic or over-pessimistic
expectations of cash flow and earnings.
This is basically saying that they could record their unearned revenues as they have received the
money for the work and they have completed the work. As long as they had a contract saying
they are going to do the work they could record it as revenue and as an asset.