He asked Ms. Maze to prepare an income statement for the bank in accordance with generally accepted accounting principles (GAAP). In addition, since the executives were on a profit-sharing scheme, it was necessary to determine profits in order to pay year-end bonuses. Ms. Maze entrusted this task to her young staff accountant, Luis Norman, who had onty recently graduated from college and was on his rst job. After he familiarized himself with the facts, Norman realized that he needed to look up the GAAP accounting rules for preparing an income statement. At that same moment, he also realized with some constematicn that he had sold his college accounting textbook when the course was over. Norman headed to his college library to find the relevant reference material. A review of his old accounting textbook told him that M GAAP principles were particularly relevant for his current task. The first was the matching principie, which requires that costs and revenues be matched by time periods. The other was the principle of revenue recognition. His next step was to copy and read the relevant sections of these principles from the pronouncements of the Financial Accounting Standards Board. Attachment 1 shows the results of Norman's research into the appropriate GAAF' rules for preparing income statements. On first reading the material, Norman thought it was going to be easy to prepare an income statement. He remembered learning that for most businesses' revenue was earned when good were sold (that is. when title passed from the seller to the buyer}. However, as he read the statements of the FASB, he realized that revenues could be recognized when production was complete or when cash was collected. According to the FASB standard. "revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benets represented by the revenues\"? Norman realized that in order to determine the revenues for 2008, he must first determine when the earning process is complete. This. however, was not a usual business. Therefore, Norman was not sure when Fteptile Factory Enterprise was "entitled to the benefits represented by the revenues". In order to determine the critical point in the operations cycle when the business could do this. he decided to talk to the three top executives. His first conversation was with Brian Chu, 'v'.F'. Production. Brian told him that catching crocodiles was the most critical activity for the business since \"it is difcult to trap them suckers and you can lose a few limbs in the process if you are not careful." Norman next spoke to Marco Diaz, VP. Sales. Marco pointed out that while catching may be a dangerous activity, no one is likely to buy a crocodile because it is risky for us to catch them. He felt the company's success this year was largely due to his clever holiday season advertising campaign with its theme of: "this year give that special someone something live! Someday they can produce their own shoes, handbags, and belts." Norman's final conversation was with Shelley Maze, VP. of Operations. She told Norman that. in her opinion, the cmcial activity for the business was cash collection. As she put it: "Brian and Marco have never tried collecting cash. If they did, they would find out in a hurry that it is difficult to collect cash from people who keep crocodiles as pets. Besides. we don't have a collection agency that is willing to repossess live crocs!' 2Financial Accounting Standards Board, Statement of Concepts S' 5, Paragraph 33. The Lawyers Call Even as Norman was puzzling over how to proceed. he received a call from Ms. Shelley Maze. "Luis, | just heard from our lawyers. Apparently. Clyde Property Management {the property management company that leased us the warehouse and ofce space} is claiming that we had no right to break the