Answer the following questions based on the Oracle System.
1. What assumptions underlie Oracle's recognition of revenue for license fees? Are these assumptions reasonable given the firm's business and operating policies?
2. Estimate Oracle's 1990 sales if revenue is recognized at delivery rather than when the contract is signed. Hint: use the estimate provided by the controller of the effect of recognizing revenue at delivery on days receivable.
3. If the firm's 1990 cost of sales to sales ratio and average tax rate are unaffected by a change to the more conservative revenue recognition method, what would be the affect of this accounting change on the company's 1990 net income?
4. Use the 1990 cost of sales to sales ratio and average tax rate to estimate the size of the opening retained earnings write-off required if Oracle decides to retroactively adopt the new revenue recognition method.
5. How would a change in revenue recognition affect the firm's lending contracts and management compensation?
6. How do you expect investors to respond if Oracle decides to recognize revenue at delivery rather than when the contract is signed?
7. Do you recommend that Oracle make the accounting change? Why?