1. A gaming company provides an online game Capture the tower to its subscribers that requires them to purchase virtual inventory like flags, tanks and boats to play the game. While inventory like flags are consumables i.e. once used, they cannot be used again in the game, some others like the tanks are durables; they continue to be used until they are destroyed by the enemy. The company is obligated to continuously display the durables on its platform. Therefore, they spread the revenue earned from the sale of durables over 18 months the period they feel that players typically use their durable inventory. The revenue from the Consumables, on the other hand, is immediately recognized on sale.

This game became very popular among teenagers and the youth and the company saw its subscription rising rapidly in the first five years since the launch. Over the last year, the company is seeing the subscription curve and consequently, sale of inventory, flattening. The company decided that customer behaviour had changed and hence, they were revising their revenue recognition policy with regard to the durables; they were going to now recognize that revenue over ten months.

1. Illustrate how the companys revenues for consumables and durables respectively,will be recorded using the accounting identity. Assume your own numbers for a hypothetical sale.
2. Using the same set of numbers, illustrate the effect on the Profit and Loss statement, balance sheet and cash flow statement by the change in revenue recognition policy of the firm. What will be the effect on each statement? Explain your answer clearly.

Do you think there could be a possible ethical issue in such a policy change? Explain your stance clearly.