To help you become familiar with the accounting standards, this case is designed to take you to the FASB’s Web site and have you access various publications. Access the FASB’s Web site at www.fasb.org. Click on “Pronouncements & EITF Abstracts.” In this chapter, we discussed earnings management and how companies might be tempted to inappropriately increase earnings by either overstating revenues or by understating expenses. For this case, we will use Statement of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists.” Open FASB Statement No. 48.
1. Read paragraph 4. If a customer returns an item that is defective, do the provisions of this accounting standard apply?
2. Read paragraph 6. Part (f) of this paragraph indicates that the amount of future returns must be reasonably estimable if revenue is to be recognized. However, footnote 3 indicates that certain returns are not considered returns as far as this standard is concerned. What types of returns are excluded?
3. Read paragraph 8. Future returns must be estimable. This paragraph identifies instances when a reliable estimate may be unavailable. Identify two instances where the ability to estimate returns would be impaired.