The accuracy of the financial reporting system depends on answers to a few fundamental questions. At what point has revenue been earned? At what point is the earnings process complete? When have expenses really been incurred?
During the 1990s the stock prices of dot-com companies boomed. Many dot-com companies earned most of their revenue from selling advertising space on their Web sites. To boost reported revenue, some dotcoms began swapping website ad space. Company A would put an ad for its website on company B’s website, and company B would put an ad for its website on company A’s website. No money ever changed hands, but each company recorded revenue (for the value of the space that it gave up on its site). This practice did little to boost net income and resulted in no additional cash flow—but it did boost reported revenue. Regulators eventually put an end to the practice.
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