What is the problem from accounting stand point, not legal.

Widget, Inc. is a publicly-traded company with a December 31 year-end. Widget is having a small and hopefully temporary cash flow problem in addition to a potential drop in earnings due to the slowdown in the economy. Projections show that Widget could miss their Wall Street earnings target by as much as $700,000 or 2%. This would result in a significant decline in the market value of Widget's stock. As a precaution, the Widget CEO called a meeting of her management team to discuss this problem and develop a strategy to address it. At the meeting, the Widget CFO, Tyrus Winnington, outlined the current financial condition of the company and defined the issues to be addressed. The CEO directed each executive to return in a week with a written plan to improve the company's cash flow and earnings. Additional borrowing would not be an option due to existing debt covenants that limit the amount that Widget can borrow in the future without approval of all current lenders. At the next meeting, Winnington presented the following plan: On May 1, 2021, Widget will sell $5,000,000 (Widget's cost) of its existing inventory to User Friendly, Inc. (Friendly), one of Widget's supply chain partners. Legal title will pass at the time of the sale. Friendly will use the inventory as collateral to obtain a $5,800,000 loan (with Widget guaranteeing the loan), which will be paid to Widget on June 15, 2021 as payment for the inventory. Widget will agree to repurchase the same inventory from Friendly on January 15, 2022 (after Widget's year- end) for $5,900,000 (which will include storage and insurance charges, plus any interest paid by Friendly to the bank). Friendly will transport the inventory and store it in a public warehouse until the repurchase. After rejecting the other plans that were presented, the CEO declared Winnington's plan as a win-win for everyone because the pressure on cash flow would be relieved and Widget would meet its earnings target as the result of an increase in sales revenue of $5,800,000 and gross profit of $800,000 ($5,800,000 - $5,000,000). It would also have the added benefit for Friendly of increasing its sales revenue by $5,900,000 when the inventory is repurchased. Amelia Emerson, the Widget Controller, has concerns about this plan and how to account for it, but does not want to reveal her concerns until she can support a position with absolute certainty. She vaguely remembers something called a "product financing arrangement." Amelia wants you to recommend how to account for the proposed plan and evaluate whether it will accomplish the financial goals of the CEO and CFO. Amelia was only recently hired as the Controller of Widget and doesn't want to upset the CEO and CFO in case she is wrong. Even though it's Amelia's responsibility to decide how to account for the proposed plan, Amelia is tempted to just let the CEO and CFO do whatever they want and abdicate her responsibility. However, she doesn't want to become involved with financial statements that violate GAAP and therefore, are misleading. Financial statements issued by a publicly-traded company that are misleading could violate federal securities laws and result in criminal and civil penalties. Widget, Inc. is a publicly-traded company with a December 31 year-end. Widget is having a small and hopefully temporary cash flow problem in addition to a potential drop in earnings due to the slowdown in the economy. Projections show that Widget could miss their Wall Street earnings target by as much as $700,000 or 2%. This would result in a significant decline in the market value of Widget's stock. As a precaution, the Widget CEO called a meeting of her management team to discuss this problem and develop a strategy to address it. At the meeting, the Widget CFO, Tyrus Winnington, outlined the current financial condition of the company and defined the issues to be addressed. The CEO directed each executive to return in a week with a written plan to improve the company's cash flow and earnings. Additional borrowing would not be an option due to existing debt covenants that limit the amount that Widget can borrow in the future without approval of all current lenders. At the next meeting, Winnington presented the following plan: On May 1, 2021, Widget will sell $5,000,000 (Widget's cost) of its existing inventory to User Friendly, Inc. (Friendly), one of Widget's supply chain partners. Legal title will pass at the time of the sale. Friendly will use the inventory as collateral to obtain a $5,800,000 loan (with Widget guaranteeing the loan), which will be paid to Widget on June 15, 2021 as payment for the inventory. Widget will agree to repurchase the same inventory from Friendly on January 15, 2022 (after Widget's year- end) for $5,900,000 (which will include storage and insurance charges, plus any interest paid by Friendly to the bank). Friendly will transport the inventory and store it in a public warehouse until the repurchase. After rejecting the other plans that were presented, the CEO declared Winnington's plan as a win-win for everyone because the pressure on cash flow would be relieved and Widget would meet its earnings target as the result of an increase in sales revenue of $5,800,000 and gross profit of $800,000 ($5,800,000 - $5,000,000). It would also have the added benefit for Friendly of increasing its sales revenue by $5,900,000 when the inventory is repurchased. Amelia Emerson, the Widget Controller, has concerns about this plan and how to account for it, but does not want to reveal her concerns until she can support a position with absolute certainty. She vaguely remembers something called a "product financing arrangement." Amelia wants you to recommend how to account for the proposed plan and evaluate whether it will accomplish the financial goals of the CEO and CFO. Amelia was only recently hired as the Controller of Widget and doesn't want to upset the CEO and CFO in case she is wrong. Even though it's Amelia's responsibility to decide how to account for the proposed plan, Amelia is tempted to just let the CEO and CFO do whatever they want and abdicate her responsibility. However, she doesn't want to become involved with financial statements that violate GAAP and therefore, are misleading. Financial statements issued by a publicly-traded company that are misleading could violate federal securities laws and result in criminal and civil penalties