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Assignment on revenue recognition
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Vitamix Revenue Recognition – “Special Cases”
Proper revenue recognition is important in because it has a direct impact on quarterly income statements, incentive calculations, investor confidence, and perception of an organizations financial health. The scandals at Enron and WorldCom illustrate how important properly recognize revenue is to the financial integrity of a company and how abuse can be extremely dangerous. (Labaton, 2006) To maintain consistency across organizations, the Securities and Exchange Commission (SEC) relies on the standards published by the Financial Accounting Standards Board (FASB) to establish the guidelines for revenue recognition. (FASB, 2011)
Companies can only recognize revenue if it is both realized and earned. In many situations, this clearly takes place when the company delivers the product and receives payment. However, there are some cases when organizations physically deliver a product but do not immediately recognize the revenue. In addition, there is a case when companies do not deliver a physical product but need to recognize revenue.
We will explore how Vitamix, a manufacture of high performance premium blenders, recognizes revenue in the following special cases: Extended Warranty Sales, Household Show Consignment Sales, and Foodservice Test & Evaluation Sales. For each of these, we will explain the transaction and explore the revenue recognition logic that is associated with each.
Extended Warranty Sales
Overview
Vitamix customers are able to purchase extended warranty plans that extend their factory warranty from 7 year and additional 3 years for a total of 10 years of warranty coverage. They can purchase this product when the initially purchase the machine or at any time during the...
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...e product shipped, however the right of return by the customer changes this. Vitamix must take into account the probability and possibility that the customer may return a percentage of the product in the event that the sales event does not perform as estimated. To account for this, they create a returns allowance at the time of invoicing to account for the right of return as a percentage of the sale. This net revenue is then an accurate account of the realized and earned revenue. (Connors, 2011)
Works Cited
Connors, R. (2011, October 4). Corporate Controller. (P. Sems, Interviewer)
FASB. (2011, October 6). FASB Facts About FASB. Retrieved from FASB Website: http://www.fasb.org/facts/
Labaton, S. (2006, December 17). Accounting Scandals on Wall Street - Enron - WorldCom. Retrieved from NYTimes.com: http://www.nytimes.com/2006/12/17/weekinreview/17labaton.html
...: Wall Street Insider - Financial News, Headlines, Commentary and Analysis - Hedge Funds, Private Equity, Banks. Retrieved January 15, 2012, from http://dealbreaker.com/2010/06/wachovia-vp-had-good-reason-to-steal-money-from-bank-that-youll-probably-never-understand/
During the audit 213 sales transactions were examined to test revenue controls; 82 deviations were found and are as follows:
Plunkett, Linda M., and Robert W. Rouse. "Revenue Recognition and the Bausch and Lomb Case." CPA Journal Sept. 1998: n. pag. CPA Journal. Web. 16 May 2014.
The goal of the Codification is to simplify the organization of thousands of authoritative U.S. accounting pronouncements issued by multiple standard-setters. To achieve this goal, the FASB initiated a project to integrate and topically organize all relevant accounting pronouncements issued by the U.S. standard-setters including those of the FASB, the American Institute of Certified Public Accountants (AICPA), and the Emerging Issues Task Force (EITF)
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
For instance, Primark 's products offer customers clothing as a base product, of witch actual benefits are being to be cheap and trendy, and they may have some return policy as augmented benefit in case of defects. Each product may be realised following a new product development process to improve its success rate (Harris and Schaefer, 2015, p.43-47).
Evidently, Peregrine Systems increased its revenues by pressuring distributors and resellers to build up their inventories (known as "parking" their inventory). Through secret side or oral agreements Peregrine distributors and resellers were not obligated to pay Peregrine for their software inventories. This conduct obviously became a problem. If they could not sell Peregrine's software, they would receive their money back. According to GAAP, revenue recognition on the sale of software requires evidence that an arrangement must exist, delivery must have occurred, vendor's fees must be fixed or determinable, and collectibility must be probable before recognizing revenue. Peregrine falsely recorded this tra...
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
If due to force majeure, strike or lockout, MTD BIO deems fulfilling contractual obligations as impossible or substantially difficult, MTD BIO reserves the right to partially suspend the contract or prolongs its fulfillment to a later deadline, whereas the supplier shall not be entitled to any claims against MTD BIO.
Lyke, B and Jickling, M. (2002). WorldCom: The Accounting Scandal. CRS Report for Congress, p2.
Giroux, G. (Winter 2008). What went wrong? Accounting fraud and lessons from the recent scandals. Social Research, 75, 4. p.1205 (34). Retrieved June 16, 2011, from Academic OneFile via Gale:
FASB Statement of Financial Accounting Concepts (CON) 5, Recognition and Measurement in Financial Statements of Business Enterprises, set forth the historic guiding principle to revenue recognition. Pursuant to paragraph 83, for revenue to be recognized it must be (a) realized or realizable and (b) earned. Revenues are “realized” when products, goods, services, or other assets are exchanged for cash or claims to cash. They are “realizable” when related assets received or held are readily convertible to known amounts of cash or claims of cash. Revenue is “earned” when an entity has “substantially accomplished what it must do to be entitled to the benefits represented by the revenues.” SEC Staff Accounting Bulleting (SAB) 104, Revenue Recognition issued in December 2003 provided additional guidance to when revenue is realized or realizable and earned setting forth four basic criteria: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to the buyer is fixed or determinable, and (4) collectibility is reasonable assured.
Talluri, K. & Van-Ryzin, G. (2004) “The Theory and Practice of Revenue Management”: New York, Springer