Question

X, a public company, is an electronic goods retailer. X’s management team is very innovative and markets its products to cater to consumer trends and preferences. As such, management’s bonus is given a bonus equal to 10% on new revenues generated each year. X’s covenant with the local bank is based on its current ratio.
At the start of the current fiscal year. X changed form selling all of its products with a n optional 3rd party extended service warranty to selling an in-house service warranty as part of the normal retail selling price of the product. Therefore, the revenue stream form the service plan changed from being a commission from the 3rd party vendor, who took full responsibility for doing the actual repairs, to revenue being recorded as part of X’s selling price; X is now fully responsible for the actual repairs.
The new program was a tremendous success and accounts for a 5% increase in X’s annual revenues with a corresponding 5% increase in its accounts receivable. X’s management team wanted to continue recognizing the service revenue at the time the product is sold. X’s auditor objected to this accounting policy choice.

1. Who are two users of X’s financial statements and what are their decision-making needs?

2. What is the impact to X’s assets, liabilities, revenues and/or expenses from the proposed accounting change?

3. What are TWO relevant GAAP/ financial statement concepts applicable to this situation?

4. Give 1 case fact to support the items mentioned in 2 above?

5. Give 1 case fact to dispute the items mentioned in 2 above?

6. What is your recommendation?

7. What is the impact of your recommendation to the users mentioned in 1 above?

Answer 1

Who are two users of X’s financial statements and what are their decision-making needs?

MANAGEMENT TEAM-Management team involves the owners of the company as well as the directors of the company .so they have direct interest in the profit of the company .So, their decision making need depends upon the current market situation because when they feel its time to apply and change the policy of the company they did. Because as per market and consumer demand they seek to perform this step.

In result they find a lot of positive result and better consumer market and attraction towards their product and company.customer is the king of the market if you really want to attract customer and seek to become loyal for you ,firstly need to provide better services and benefits against your competitor policies and strategies.

BANKS AND FINANCIAL INSTITUTE -

Banks are the main component for every business because they provide finance to the business that are act as life blood for the business. so as like managemet ,owners ,government ,BANKS used the financial satements of the business and mainly keep a deep interest in the financial position of the business. so current ratio validity as well as working position of the company with valid income statement seeked by banks.

What is the impact to X’s assets, liabilities, revenues and/or expenses from the proposed accounting change?

ASSETS - Due to this change positively effect the value of the assets because due to high sales directly put impact on the cash enrichment as result of it increase in assets and prediction of strong financial position.

LIABILITIES- Lower down of liabilities are result of htis policy change because cash enrichment helps the company to timely repayment of the loans and credit that are taken by the comapany from the banks. So liablities easily get decreased.

REVENUE- Revenue of the company move on to the strong path and financial strwak is high due to positve effect of policy and in return high customer market results in high profits.That in near future helps the company to invest in some new venture and expansion also.

EXPENSES-In result side expenses are also increased because in extended warranty option certain formalities need to fulfil that involved expenses of the comapany like REPAIR of the appliances etc.

What are TWO relevant GAAP/ financial statement concepts applicable to this situation

TRANSPARENCY (FULL DISCLOSURE)- Each and every thing are completely presented clearly.No fraud are finfd in it and proper bonus declaration on the extra sale are conveyed so this concept of transaprency properly followed in it.

GOING CONCERN CONCEPT-According to this concept company wants to remains in the market and wants to grab the top most share and attraction of the public by offering new options. company want to survive in the market for long time and want to establish the uniquw identity in the mind of the consumer.so in this sitation comapny follow this concept properly.

Give 1 case fact to support the items mentioned in 2 above?

Proper workiyng with high profitability presents the case fact of the situation.

Give 1 case fact to dispute the items mentioned in 2 above

Auditor compliance of the policy and objection presents the negative situation on the company image but company folloe up the rule and regulations and perform each and every work ethically without any wrong mean so auditor never put obligations on the comapany for this because its comapany own way to perform their market strategy and customer handling policy and company timely handle management and every interested party so no one claim the comapany in wrong side.

1. What is your recommendation?

2. What is the impact of your recommendation to the users mentioned in 1 above

I recommend to put extra attention on this formulated policy because company are going on right path.But special attention need to put on retained earning and looking for competitor policies as well as perform SWOT analysis of the company for checking of strenth and weaknesses of the company for timely beating it and achieeving success and perform every work according to GAAP Standards .

IT PUT POSITIVE IMPACT ON THE IMAGE OF THE COMPANY THAT HELPS COMAPANY FOR LONG SURVIVAL IN THE MARKET AND GAINING HIGH MARKET SHARE.

THANKS..