Question

You are hired as a marketing manager for the high tech firm innovated inc. Located in Toronto. Yesterday you overhear a conversation in the elevator between the VP of sales and the vice president of the company. The VP of sales indicated that she also was disappointed in the current projections and will approach distributor to provide them with an incentive to take extra inventory to help improve the overall sale, improving the end of year results and management bonuses.

you remember learning about a concept during your undergrad referred to as "channel stuffing" which recognizes revenue early by having an intermediary company (such as a distributor) act to purchases and sell products between the manufacturing company and the end customer. you are wondering if boosting sales by asking distributors to take additional products in approved of by generally accepted accounting principles. you know that it is normal industry practice to use distributors to reach smaller customers with their more standardized computer chips. what are the benefits to Innovated inc, If they choose to send more products to distributors? what are the risks? do you have any concerns with this method of engaging in business?

Answer 1

The benefits for Innovated Incorporation through using this practice wherein they will choose to send more products to distributors would be that its recognition among its suppliers, creditors , shareholders and other stakeholders will increase as the financial statements will reflect more sales and profits earned for the period irrespective of whether they were really demanded or sold among customer base. This practices proposed by VP for the organization will result in inflation in its sales and earnings figures which will build reputation of business and help it secure more contracts or get additional credits and loans. The business will thus be able to improve its position through presenting the revenues belonging to next period , in this period which results further in Dominos effect.

There are many risks associated with the practice as it is considered to be a deceptive way of enhancing or Inflating the income or revenue. It is treated as synonymous to mis-presentation of statements and if this practice is continuously pursued it will attract government regulations, inspections and can even lead to facing lawsuits.

Yes I definitely will have a concern with this method of engaging in business as this method will falsify the statements deceiving the internal and external clients of organisation into believing untrue facts about the current position of business which might lead to overestimating the earnings, cash flow position etc resulting in complexities for future. This practice will lead to suppliers frequently returning the excess goods left unsold good leading to incurring heavy carrying costs. The practice will also result developing a backlog of products and leftover stocks. If the complexities associated with such practice will increase it might cause the company to shutdown or face serious consequences, losses and bad image among stakeholders in case they find it out.

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Thanks dear student.. Hope this helps... Rate if satisfied.. Stay safe..