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| Borealis Industries has three operating divisions – Sandstone Books, Corus Games, and Sterling Extraction Services. Each division maintains its own accounting system and method of revenue recognition. Sandstone Books Sandstone Books sells novels to regional distributors who then sell to independent bookstores and retail chains in their territory. The distributors are allowed to return up to 25% of their purchases to Sandstone, and the distributors have the same return allowance with the bookstores. The returns from distributors have averaged 20% over the past five years. During the fiscal year just ended, Sandstone’s sales to distributors totaled $15,000,000. At year end, $6,800,000 of sales are still subject to return privileges over the next six months. The balance of the book sales, $8,200,000, had actual returns of 19%. Sales from the previous fiscal year totaling $5,500,000 were collected in the current fiscal year, with 21% of sales returned. Sandstone records revenue in accordance with the method referred to as revenue recognition when the right of return exists as the company’s operations meet all the applicable criteria for use of this method. Corus Games Corus Games supplies video arcades with new games and updated versions of standard games. The company works through a network of sales agents in various cities. Orders are received from the sales agents along with down payments; Corus then ships the product directly to the customer, f.o.b. shipping point. The customer is billed for the balance due plus the actual shipping costs. During the fiscal year just ended, Corus received orders for $12,000,000 from the sales agents along with $1,200,000 in down payments. Customers were billed $150,000 in freight costs and $9,180,000 for goods shipped. After an order has been shipped, the sales agent receives a 12% commission on the product price. The goods are warranted for 90 days after sales, and warranty returns have been about 3% of sales. Corus recognizes revenue at the point of sale. Sterling Extraction Services Sterling specializes in the extraction of precious metals. During the fiscal year just ended, Sterling entered into contracts worth $36,000,000 and shipped metals worth $32,400,000. One quarter of the shipments was made from inventories on hand at the beginning of the year, and the remaining shipments were made from metals that were mined during the year. Sterling uses the completion-of-production method to recognize revenue, because the operations meet the specified criteria, i.e., reasonably assured sales prices, interchangeable units, and insignificant distribution costs. Questions The CEO of Sterling Extraction Services has asked the controller, “How do you know which orders were filled from inventory? I want you to take another look at the revenue calculation. At the current level, our incentive payments will be much lower than expected. Besides, I promised the Board of Directors that this year’s revenue would exceed last year’s by at least 12%; I don’t like not keeping my promises.” The controller is very uncomfortable with the implications of the CEO’s statement and has turned to the IMA Standards of Ethical Professional Practice for guidance. According to this guidance: A. Identify the principles that should guide the work of a management accountant. B. Identify and describe the standards that would be violated if the controller of Sterling were to manipulate the revenue calculation. C. Identify the steps the controller should take to resolve this situation. |