What is an example of improper revenue recognition that indicates significant risk?

Recording revenue before delivery of goods is an example of improper revenue recognition that indicates significant risk because it violates the revenue recognition principle, which states that revenue should be recognized when it is earned and realizable. This means that revenue should only be recorded once the goods or services have been delivered, and the risks and rewards of ownership have been transferred to the customer. Recognizing revenue prematurely can significantly inflate reported earnings and mislead stakeholders about the company's financial health.

This type of revenue recognition can lead to issues such as overstated financial statements, potential regulatory scrutiny, and loss of credibility with investors and creditors. The practice is considered risky because it could indicate financial manipulation, where a company is trying to present a more favorable financial position than what truly exists.

In contrast, deferring revenue to the next period is a conservative approach that adheres to accounting principles, while timely reporting of cash sales is standard practice. Adjusting estimates for future expenses does not relate directly to revenue recognition but instead pertains to expense reporting, making it less relevant to this question.