Bill and Hold Strategy Contribution - Essay Example

Accounting project al Affiliation) Bill and hold strategy contribution to the 1997 earnings A bill and hold strategy involve the sale of goods and products by offering substantial discounts to the buyers. The sold goods are held in third party warehouses until a later date when they will be delivered to the customers. Based on sunbeams case the high earnings experienced by the company was a result of the bill and hold strategy they had implemented to address the problem of lagging sales. The company was booking sales months before the actual billing and shipment. Therefore, the company reported high revenues in their financial performance records in the form of accounts receivable. The strategy shifted sales from the future periods to the current quarter. In addition, the approach assumed a gross profit on the future sales, which resulted in the inflation of the earnings in 1997. Therefore based on the company-adopted strategy, Dunlap accelerated the company’s revenues by 18 percent. The management had adopted this plan to improve the stock prices, which would have resulted from good earnings reports presented by the company (Sondhi, & Taub, 2008). The increase in stock prices would assist in the acquisition of debt financing for the merging process. High accounts receivables caused by bill and hold strategy The bill and hold strategy adopted by the company provided incentives to the customers to make purchases whose delivery and billing was to happen in the future. The customers were not expected to pay for the goods until when the goods were delivered. Actual payments of the current period sales occurred in the preceding quarters. Therefore, the sales were recorded in the books of accounts as accounts receivables resulting in the increase of the accounts receivables expected by the company. The company avoided a significant shortfall in revenues, therefore, the continued using the bill and hold strategy in the preceding quarters. In this case income was not recognised at the point of sale rather it was recognised immediately the customer accepted the bill and hold conditions. Earnings decline in 1998 Revenue may be earned during a period, but it is usually recognised at a point to fulfil the revenue recognition criteria, which is satisfied at the point of product delivery. Based on this revenue is recorded when there is certainty of the cash being received. Based on sunbeam’s case record of 1998 quarter first revenues were recorded in 1997 due to the fraudulent bill and hold strategy that they had adopted (Sondhi, & Taub, 2008). The sales revenue acquired in the first quarter of 1998 was used to offset futures that the company had borrowed to satisfy the bill and hold strategy. The bill and hold strategy moved earnings and sales revenue from 1998 to 1997. The decline in earnings was also because of the delay in payments by some of the customers while the company had previously accounted for their revenues. The earnings quality Earnings quality is the ability of reported income to predict a company is expected and future earnings. Sunbeams earnings strategy produced a 1997 earnings figure did not represent the company’s future profit- generating ability. Earnings generated were used to settle the massive debts the company had incurred. Revenue recognition is usually recognised when a product is delivered to the buyer. Based on the earnings management strategy there was a failure of disclosure of the strategy being used by the company to generate sales therefore resulting in shortfalls in 2008 (Sondhi, & Taub, 2008). Shareholders were not informed on the bill and hold strategy that ultimately resulted in the decline in the stock prices. The company’s management failed to disclose all the relevant materials deemed necessary for the stakeholders. The management deliberately influenced the stock prices by generating earnings through fraudulent activities. Revenue recognition at point of delivery Income is usually earned during a particular period, and it is recognised at the point in time where the revenue recognition criteria are satisfied. The revenue recognition criteria are satisfied at the point goods or services are delivered. In this case, revenue is earned, and there is certainty that there is collectability of the cash (asset) to be received. Most firms that deal in finished products recognize revenue at the actual point of sale. The point of sale occurs the moment the title is legally passed from seller to the purchaser (Sondhi, & Taub, 2008). There is usually an arms-length transaction to measure the amount of revenue to be recognized. Accounting theory is based substantially on objective measurement; therefore, it is logical that many firms would choose point-of-sale transaction in revenue recognition. The reasons why companies prefer it is because cash or near cash assets are realised upon delivery. In addition, it provides certainty in the calculation of net earnings. The accounts receivables and costs incurred in debt recovery are minimized or eliminated. Situations of revenue recognition For service-kind transactions, revenue is typically recognized based on the seller’s performance of a transaction. The performance occurs during the execution of a particular act or the passage of time. Such firms may select the following methods to recognize revenue that include completed performance method, proportional performance method and particular performance method. In some non-service firms, revenue is recognized as the productive activity occurs rather than recognition at a later period, which would be the point of sale. Revenue is recognized as a productive activity using the percentage-of-completion accounting method to long-term construction contracts. In this procedure, revenue is estimated based on the degree of contract performance and is recorded as earned at the time in which the productive activity took place. Revenue recognition through the accretion concept is not the product of recorded transactions but achieved by the process of making relative inventory valuations. Examples of growth concept application would include growing timber, the aging of certain types of liquors and wines (Sondhi, & Taub, 2008). Other revenue recognition scenarios Revenue is at times recognized at the completion of a production activity, or after the point of sale. The revenue recognition at the end of production is acceptable only if certain conditions are there. The essential conditions include the existence of s relatively steady market for the product, nominal marketing costs, and homogeneity of the units. These three conditions are not frequently present apart from the case of particular agricultural products and precious metals (Sondhi, & Taub, 2008). In these scenarios, it has been considered suitable to recognize revenue at the product completion. In rare situations may it be necessary to postpone the revenue recognition until past the point of sale. The conditions would have to be unusual to defer recognition of revenue beyond the point of sale because of the desirability to recognize it at the point of sale. A scenario where it would be justified to defer revenue recognition on the point of sale would occur where there is considerable doubt as to the eventual collectability of the receivable. Reference Sondhi, Ashwinpaul C., & Taub, Scott A. (2008). Revenue Recognition Guide. Cch Inc. Read More