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How SAB affects Wareham’s revenue recognition? Accordingly to SAB 101, all of the following conditions should be accomplished to recognize revenue. During our analyses, we have identified several missing conditions in current situation, accordingly to information provided. * Evidence of Order Arrangement: SAB 101 requires an evidence to identify any transaction as a formal sales order. During our analyses we have found that in the sales transactions tested by Soma Desai, only the Technology Devices Division’s newly adopted sales strategy is not fulfilling this requirement.
To prevent further conflicts, a regulation about the written order format and sales agreements should be adopted in company-wide. * Delivery of the Goods and Services: To identify a sales transaction as revenue, SAB 101 also requires that the seller should deliver the goods or render the services which are specified in the order. This requirement would be most influential part of the SAB 101 regulation in Wareham SC’s current revenue recognition policy. Because, we have identified that all of the sales transactions tested by Soma Desai recognized as a revenue at the time of shipment.
Also, Wareham SC has a return policy which gives it’s customers to return back the dissatisfying products back. Long guarantee clauses in contracts and modified, non-standard products increase the risk of such returns. * Price Determination: Another requirement comes with SAB 101 is that the seller’s price should be fixed or determinable. We have controlled the pricing terms in the sales transactions provided. In all transactions, we have found that price is fixed with customer.
But, since entity provides some custom products&services, a standard pricing policy would be required to prevent possible problems. * Collectability of Sales Proceeds: SAB 101 also requires that entity should be able to collect the related sales proceedings. When we analyze the given examples of sales, we have found that there’s a risk arises with the new strategy adapted to entity’s Tech. Devices Division. Division works with its distributors and requires them to held extensive inventories but determined payment term is very long and there’s no credit risk analyses made.
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