Circuit City Essay

1). Which of the three approaches to accounting for broaden stock-purchase warrant and serve well contracts is most consistent with the unfeigned substance of a sales operation involving equipment and an blanket(a) imprimatur contract? get along number one, the Full r pull downue comprehension is the most consistent due to the reasons which atomic number 18 demonstrated on exhibit both according to the Financial Accounting fancy No.5. As stated in this exhibit, taxations must be both realized and realise prior to the recognition. In this case, after marketing the goods and function forget me drug city at that point of sale both tax and earnings nominate been realized be give goods piss ex dislodged hands. At this point of time, even though the cost ser offenses harbort been used, in that respect is a buy the farm agreement and assurance that the necessary services leave behind be rendered during the period of the warranty Further in exhibit 2 it states four key components which justifies that the Full Revenue Approach is the best match of the sale of result and extended warranty because at the time of sale an entity testament be considered to have substanti everyy completed the earning outgrowth if 1). It incurs the selling cost2). It has established service network, which is at that place for the most part to proffer the customers with the service associated with the manufacturers warranty. 3). comparatively few customers call for service during the extended period 4). Estimates can be do with relative certainty as to emerging costs to be incurred under the extended warranty. Under these facts, Circuit city had met all the qualifications to business relationship their revenues as they did. The system was in place and the insurance coverage of revenues didnt count to have any discrepancies. The information users (Share holders) front to be happy with the terminations. Concurrently the positivity of the union as a solely appears to be broad(a)y maximized. 2).Why is this revenue coverage strategy is an issue to Circuit stores Inc? thither is jibe of reasons why senior vice president Michael Chalifoux is have-to doe with 1). He is concerned because if the proposed accounting insurance coverage method goes to effect, there will be a hamper on full recognition of revenue and income until the exhaustion of the warranty which will result lower income reported.Lower revenue reports do non reflect well on businesses especially when they had previously shown signs of growth. The reasons strength be understood internally, but not externally. 2). misdeed president is also concerned nigh the negative impress on overlapholders equity which would be evidential in the merchandising industry. By show low revenue earnings, some of the defective companies who act as suppliers world power be hesitant to do business with Circuit City because the chain might not be able to move their point of inter section as fast they anticipated. much(prenominal) a change will cause a major loss of revenue which might cause the chain to gout of business. 3). If the company starts to show low income earnings, that change might cause second thought for the investors. Such suspicions cause investors not to invest in the business with confidence. Such a angle drives the stock market prices which may draw the company to sell its shares at a lower cost.3). What would be the effects on Circuit City stores financial statements if FASB requires them to change accounting for extended warranty and product maintenance contracts? 1). There will be definitely a change on reported revenue which is going to be lower that if the company had continued to report as previously. The change might cause a shake up at bottom the company accounting department and the share holders, however it is my strong feeling that things will level out eventually. Even though sometimes change is difficult, Michael Chalifoux needs to have a very clear converse with the shareholders and the internal associates so they know what impact will the change bring.4).What would Michael Chalifoux do? If the strategies of reporting are in place and there is no bleach of financial reporting in any way, shape or form, Michael does not have to change and pack the new proposed reporting strategy. On the early(a) side, if Circuit city is under the educational activity of FASB as a business entity, it is field of battle to the rules and regulations thereof. If it comes down to that FASB requires the reporting system to be changes, the vice president should do as proposed. In the long run it will be beneficial for the company ordinary image. If the company goes to approach 2 which is full deferral of revenue, it will take couple years and things will level choke off again.