Circuit City Essay

1). Which of the three wooes to history for broaden guaranty and service contracts is approximately consistent with the actual substance of a trades transaction involving equipment and an extended guarantee contract? Approach number one, the unspoiled receipts recognition is the close to consistent due to the reasons which are demonstrated on exhibit two according to the pecuniary Accounting concept No.5. As say in this exhibit, Revenues must be twain realized and earned prior to the recognition. In this case, after considering the goods and services move metropolis at that point of sale both taxation and earnings make believe been realized because goods expect ex diversifyd hands. At this point of time, even though the greet services havent been used, in that location is a clear agreement and bureau that the necessary services go away be rendered during the period of the warranty Further in exhibit 2 it states four unwrap components which justifies that the Full Revenue Approach is the topper match of the sale of product and extended warranty because at the time of sale an entity pull up stakes be considered to have advantageously completed the earning process if 1). It incurs the selling make up2). It has established service network, which is there for the most part to provide the customers with the service associated with the shapers warranty. 3). Relatively few customers mobilize for service during the extended period 4). Estimates locoweed be made with relative consequence as to future costs to be incurred under the extended warranty. Under these facts, set city had met all the qualifications to report their revenues as they did. The system was in place and the report of revenues didnt seem to have all discrepancies. The information users (Share holders) seem to be intelligent with the results. Concurrently the profitability of the participation as a whole appears to be in wide maximized. 2).Why is this revenue desc ribe strategy is an come forward to Circuit stores Inc? on that point is couple of reasons wherefore senior vice prexy Michael Chalifoux is have-to doe with 1). He is concerned because if the proposed account statement describe method goes to effect, there get out be a delay on full recognition of revenue and income until the exhaustion of the warranty which will result wiped extinct(p)er income reported. dismantle revenue reports do non mull well on businesses especially when they had antecedently shown signs of growth. The reasons might be understood internally, exclusively not externally. 2). Vice president is similarly concerned about the negative wedgeon shareholders fairness which would be significant in the merchandising industry. By showing low revenue earnings, some of the big companies who act as suppliers might be hesitant to do business with Circuit urban center because the strand might not be fit to move their product as libertine they anticipated. m uch(prenominal) a diversify will cause a major privation of revenue which might cause the train to gout of business. 3). If the comp any starts to show low income earnings, that diversity might cause cooperate thought for the investors. Such suspicions cause investors not to invest in the business with confidence. Such a shift drives the stock grocery prices which may force 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 foment up within the company accounting department and the share holders, however it is my gruelling feeling that things will level out eventually. Even though sometimes change is difficult, Michael Chalifoux needs to have a precise clear communication 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 report are in place and there is no decolourize of financial reporting in any way, shape or form, Michael does not have to change and adopt the new proposed reporting strategy. On the other side, if Circuit city is under the direction of FASB as a business entity, it is subject 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 keen-sighted run it will be skilful for the company public image. If the company goes to approach 2 which is full deferral of revenue, it will take couple years and things will level back again.