Scenario: In conducting year-end inventory counts, your audit team is debating the impact of the client's right of return policy both on inventory valuation and revenue recognition. The assist controller argues that there is no need to worry about the return policies since they have not changed in a while. The audit senior wants a more authoritative answer and has asked you to conduct some research of the authoritative literature before she presses the point with the client.

Instructions:

If your school has a subscription to the FASB Codification, go to the homepage of theAmerican Accounting Associationto log in and prepare responses to the items below. Provide Codification references for your responses.

a.Analyze the implications of authoritative guidance for revenue recognition when right of return exists.

b.Identify when this guidance would be important for a company.

c.Sales with high rates of return can ultimately cause inventory to be misstated. Formulate a conclusion as to whether returns are allowed, and whether different industries are able to make different types of return policies.

d.Determine in what situations a reasonable estimate of returns would be difficult to make.