March 14, 2011
Chapter 18 Case
Discussion Questions, Part 1.
1. When judging whether MiniScribe’s revenue recognition practices were consistent with GAAP, Reggie Lewis should have reviewed Section 605 of the Accounting Standards Codification concerning everything surrounding revenue recognition. More specifically ASC 605-25-1 states that, “The recognition of revenue of an entity during a period involves consideration of the following two factors, being realized or realizable and being earned.” In terms of revenue realization, FASB Concepts Statement No. 5 states that, “revenue is realized when products, merchandise or other assets are exchanged for cash or claims to cash.”
In MiniScribe’s case, by booking sales when goods are shipped to the warehouses rather then when they were shipped to customers to increase sales, they were not following the Accounting Standards Codifications guidelines of reporting revenues when earned. Based on these documents Reggie, and not his superior, is right to question the practices of MiniScribe in their effort to increase sales.
2. Reggie is in an extremely tough position. While his superior’s main goals are to increase sales, Reggie should realize as a worker in the company that the goal should be to increase sales ethically and by the rule book. Although his superiors may not want to hear it, Reggie should tell them about their faulty practices in reporting revenue. Although his boss may see this as a lack of enthusiasm to increase sales on Reggie’s part, if his boss is a decent and somewhat ethical businessman as he should be, he will realize that Reggie is only trying to help the company. If Reggie does not say anything, the company will continue their unethical practices and while they may continue to see sales increases in the couple years, in the long run not accounting by the rule...