Executive Summary Revenue Recognition and Wareham Sc Systems, Inc.

901 Words Apr 21st, 2013 4 Pages
Revenue Recognition and Wareham SC Systems, Inc.

Wareham SC Systems, Inc. is a capital equipment and testing instrument manufacturer and supplier comprised of three divisions: the Glendale Division, the Advanced Technology Division and the Technical Devices Division (Anthony, Hawkins, & Merchant, 2011, p. 137). In 1999, Somai Desai, the company’s chief financial officer, received news that the Security Exchange Commision (SEC) issued a new set of revenue recognition and reporting guidelines which were to be implemented no later than the fourth quarter of 2000. These new guidelines called the Staff Accounting Bulletin No. 101 (SAB 101), provided more specific criteria for revenue recognition and are listed as
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This means that under the company’s current policy, revenue is recognized too early, before delivery, while actual payment is not received until 30 days after customer acceptance or until the 90-day warranty period has ended. Furthermore, the 90 day warranty provision creates an uncertainty in the collectibility of sales proceeds.

The advance technology division manufactures, develops, and sells specialized manufacturing equipment to include installation services which is sold on a time and materials basis. Title is also passed upon delivery. The sales contract with Sandham Inc. included certain provisions that made the collectibility of sales proceeds uncertain due to the obligation that the equipment had to meet Sandham’s requirement of compatibility with manufactured equipment from other companies which Wareham could not replicate during testing at their facilities. This contract also provides customer acceptance provision that grants Sandham a full refund if the product was not accepted within 120 days. Due to high development and manufacturing costs, these factors increases the risk that the company will take a significant loss in revenue if the product is rejected. For XL Semi, the provision outlining the cost of installation services which can vary from 1% to 3% of the total arrangement fee ignores the

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