Case 1.4
CASE 1.4 1. Revenue must be both earned and realized before it is recognized. That is, the product must have been delivered or the services must have been provided to the customer. Also, the amount of the sale needs to be fixed and determinable, and there must be a belief that the cash will be collected from the customer in a timely manner. This is important to the users of financial statements because it gives them certainty that the dollar amount on the financial statements is accurate.
2. The amounts of the sale were not determinable, nor was there any reason to believe that the cash would be collected in a timely manner from the customer. It shouldn’t have been recorded as revenue either because the customer also did not assume ownership of the merchandise/products. However, Sunbeam would still write it down as revenue, and wouldn’t take it off the customer would return it.
Accounts Receivable XX,XXX Sales XX,XXX
When the merchandise would be returned, they should have taken that into account with the following:
Sales Returns and Allowances XX,XXX Accounts Receivable XX,XXX
However, Sunbeam would simply ignore the return and leave the revenue on the books. 3. PCAOB reads, “If one or more material weaknesses exist, the company's internal control over financial reporting cannot be considered effective.” It is apparent that Sunbeam did not have effective internal controls over its financial reporting related to revenue recorded in its financial statements. Sunbeam should have measured or implemented internal controls over the newly devised “distributor program,” back in 1997 when all the changes started taking place. It seems that all the misstatements started when Dunlap took over as its CEO. He had no barriers to what he could and could not do, which shows the high risk of fraud and low internal controls. 4. I would first of all ask to see the written invoices sent out to the customers, however, since this can be
2. The amounts of the sale were not determinable, nor was there any reason to believe that the cash would be collected in a timely manner from the customer. It shouldn’t have been recorded as revenue either because the customer also did not assume ownership of the merchandise/products. However, Sunbeam would still write it down as revenue, and wouldn’t take it off the customer would return it.
Accounts Receivable XX,XXX Sales XX,XXX
When the merchandise would be returned, they should have taken that into account with the following:
Sales Returns and Allowances XX,XXX Accounts Receivable XX,XXX
However, Sunbeam would simply ignore the return and leave the revenue on the books. 3. PCAOB reads, “If one or more material weaknesses exist, the company's internal control over financial reporting cannot be considered effective.” It is apparent that Sunbeam did not have effective internal controls over its financial reporting related to revenue recorded in its financial statements. Sunbeam should have measured or implemented internal controls over the newly devised “distributor program,” back in 1997 when all the changes started taking place. It seems that all the misstatements started when Dunlap took over as its CEO. He had no barriers to what he could and could not do, which shows the high risk of fraud and low internal controls. 4. I would first of all ask to see the written invoices sent out to the customers, however, since this can be