A recent report on Blockbuster Video commented that Blockbuster seems to have unusual suc¬ cess in opening new franchises during the Christmas season. It appears that during each of the past few years product sales to new franchises have increased significantly in the fourth quar¬ ter. The report also noted, however, that Blockbuster recognizes revenue when products are shipped and there is no indication that the new franchises receiving the merchandise were actu¬ ally open for business. REQUIRED:

a. How could the policy of recognizing revenue when products are shipped enable a company like Blockbuster, who operates through franchises, to “manage” earnings?

b. Is recognizing revenue when products are shipped necessarily a violation of GAAP? Explain.