Inter Fin Acct 1 Disc Question 1

Discussion Question #1

Consider the following scenario:

Assume you are the Director of Financial Reporting for New Vertical Corp, a manufacturer of self-driving cars. The company became publicly traded in 2020. Fiscal years 2020-2022 were highly profitable because the company was the first to market. However, the company reported a loss of $10 million in 2023 due to increased competition.

It is now December and the end of fiscal year 2024 is approaching. It has been another rough year with more competitors entering the market and lower sales revenue due to market saturation. You check your emails and find the following message from the company’s CFO:

“I just spoke with the auditors and they will require us to record an impairment loss if we have a large amount of unsold cars sitting in inventory at the end of the year. The impairment loss would reduce 2024 net income below our debt covenant threshold and potentiallyforce the company into bankruptcy.Bottom line – we need to sell at least 500,000 cars before the end of the year or we may be out of a job.

What if we offer a friends and family discount? The discount would require $0 down payment, can be paid in installments over 10 years with no interest, and can be returned for a full refund anytime in the next year. We could dramatically lower our ending inventory, avoid an impairment loss, and boost our revenue! Honestly, most of the cars will probably be returned next year, but we can worry about that next year.What do you think?”

Consider the following prompts:

• Explain how you would apply the five-step model for revenue recognition process if a car is sold under normal conditions.
• Identify at least one difference in the revenue recognition process if a car is sold with the friends and family discount.
• Do you support the CFO’s plan?