Excello Communications
Camille O'Roarke
ETH/376
September 15, 2014
Ding Hardin

Excello Communications

In the Excello Communications scenario, the CFO Terry Reed is faced with a dilemma. Sales have been dropping due to competition from overseas manufacturers. Mr. Reed’s concern with these reduced sales is the impact it will have on bonuses, stock options, and share prices. With a large order of $1.2 million placed on December 20, 2010 by Data Equipment Systems, Mr. Reed sees an opportunity to end the year with higher revenue than originally expected. The problem is that the customer has a stated contingency that the product is not delivered until January 11, 2011 as they do not have enough space in their warehouse to accommodate such a large order. Mr. Reed wants to be able to record this sale for the year ending 2010. This would violate the revenue recognition principle according to GAAP guidelines and would be looked at as an earnings management tactic, which is viewed as an unethical practice by the AICPA and GAAP. The CFO approaches his accounting department with the expectation that they come up with a solution to this problem. The accounting department is well aware of the rules and guidelines in place when it comes to revenue recognition, but as a team come up with three possible scenarios. One, to transfer this order to an offsite warehouse to hold until 2011, creating the perception that the product was sold. Two, transfer the product to Data Equipment Systems on December 31, with an agreement that they can return the product for a full refund in January 2011. Three, offer a discount of 10% to accept the product by December 31, 2010.
Legality of each scenario With the first scenario, the idea of transferring the product to an offsite warehouse is the most blatant misstatement of revenue. Recording revenue before the earnings process