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Ethical Issues Involving Revenue Recognition

Ethical Issues Involving Revenue Recognition

Flash Newton is national sales director at Bright & ShinyToothpaste Company. The firm manufactures and distributes a fullline of premium-price personal care products sold through acarefully selected set of distributors nation wide. The popularityand profit margins of the Bright & Shiny product line make    distributorships very profitable and there is intense competitionwhen one becomes available.

Flash, and the regional sales directorsworking for him, are compensated by a base salary and a significantbonus tied to percentage increases in yearly sales. Because of animpending recession, sales have been mostly flat during the first three quarters of the year. On October 3, Flash convened a nationalsales meeting with representatives of all distributors. At that meeting, he presented the distributors with Bright & Shiny’s newest sales plan. All distributors would be required to buy, during the 4th quarter, up to 2 years’worth of inventory of the firms’ products. Further, the prices charged on these special purchases would be 10% greater than usual. Any distributors not agreeing to the proposal would automatically lose their distributorship. Because most distributors are not expected to have cash readily available to pay for these additional purchases under the usual 30-day credit terms, Bright& Shiny will allow up to 12 months to pay.

The new policy has been a huge success and by year end, total  orders and shipments to distributors are up by 12% over the previous year. Bright & Shiny recorded all shipments as revenueeven though some distributors were told by lower-level managers that they could return unsold products. Because many distributors could not handle the large shipments in their usual storage facilities, many orders have been shipped to third-party warehouses for storage at Bright & Shiny’s expense. At Flash’s suggestion, and to obtain maximum benefit of this new sales program, the company held the books open for a few days afterDecember 31 to obtain and ship additional orders.

Required: Identify and explain any problems you see withthe sales plan. If you were Bright & Shiny’s CEO, whichaspects of the sales plan would you have approved and which wouldyou have denied. Why? .

Apr 30 2018 View more View Less

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