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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Ethics and Revenue Recognition

Alan Spalding is CEO Of a large appliance wholesaler. Alan is under pressure from Wall Street Analysts to meet his aggressive sales revenue growth projections. Unfortunately, near the end of the year he realizes that sales must dramatically improve if his projections are going to be met. To accomplish this objective, he orders his sales force to contact their largest customers and offer them price discounts if they buy by the end of the year. Alan also offered to deliver the merchandise to a third-party warehouse with whom the customers could arrange delivery when the merchandise was needed.

Required:

What are the probable consequences of this behavior for the company in future periods?

To determine

Revenue recognition:

Revenue recognition is referred to the time of recognition of revenue by the business firms in the books for stating the respective revenue in the statement of profit and loss in the respective year and time. It does not make difference whether it is received or not.

Accrual Accounting:

In accrual-accounting method, the revenue is recognised at the point of sale i.e. when the possession is transferred to the customer.

The probable consequences for the behaviour of Alan for increasing the sales of the company in the future periods.

Explanation

The probable consequences may be that the customers will not intend to buy in the whole year and wait for the discounts in the last time of the year. This behaviour also encourage the customers to buy the things they do not need because of discount offer which in later results in returns of such goods...

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