Circuit City Essay

1). Which of the three approaches to accounting system for blanket(a) sanction and avail contracts is or so consistent with the actual substance of a sales transaction involving equipment and an broaden warranty contract? Approach number one, the generous revenue intuition is the most consistent due to the reasons which are demonstrated on process two according to the Financial Accounting concept No.5. As express in this exhibit, Revenues must be both completed and earned preliminary to the recognition. In this case, after selling the goods and services Circuit city at that point of sale both revenue and earnings view as been realized because goods meet exchanged hands. At this point of time, even though the greet services havent been used, there is a clear placement and assurance that the necessary services will 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 m atch of the sale of product and panoptic warranty because at the time of sale an entity will be considered to have substanti tout ensembley completed the earning process if 1). It incurs the selling cost2). It has established service network, which is there for the most part to provide the customers with the service associated with the manufacturers warranty. 3). Relatively few customers call for service during the extended period 4). Estimates bum be made with relative certainty as to future be to be incurred to a lower place the extended warranty. Under these facts, Circuit city had met all the qualifications to report their revenues as they did. The system was in place and the reportage of revenues didnt seem to have any discrepancies. The information users (Share holders) seem to be felicitous with the results. Concurrently the profitability of the company as a whole appears to be fully maximized. 2).Why is this revenue reporting strategy is an issue to Circuit stores Inc? in that respect is couple of reasons why senior vice president Michael Chalifoux is concerned 1). He is concerned because if the proposed accounting reporting method goes to effect, there will be a delay on full recognition of revenue and income until the enervation of the warranty which will result lower income reported.Lower revenue reports do not reflect well on feares especially when they had previously shown signs of growth. The reasons capability be understood internally, but not externally. 2). Vice president is as well as concerned about the negative impacton shareholders equity which would be significant in the merchandising industry. By screening low revenue earnings, some of the big companies who act as suppliers abilityiness be hesitant to do business with Circuit City because the set up might not be able to move their product as fast they anticipated. Such a change will cause a major loss of revenue which might cause the chain to gout of business. 3). If the co mpany starts to show low income earnings, that change might cause southward thought for the investors. Such suspicions cause investors not to invest in the business with confidence. Such a shift drives the stock market prices which may fight the company to sell its shares at a lower cost.3). What would be the effectuate 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 within the company accounting department and the share holders, however it is my strong feeling that things will direct out eventually. Even though sometimes change is difficult, Michael Chalifoux needs to have a very clear communication with the shareholders and the internal associates so they distinguish what impact will the change bring.4).Wh at 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 involve 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 long run it will be beneficial for the company human race image. If the company goes to approach 2 which is full deferral of revenue, it will feign couple years and things will level back again.