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According to InvestoPedia website (2014) the definition of the bill and hold strategy is “A method of conducting sales by billing the customer on the same day the transaction occurs, but not delivering the goods until a later date.

October 20, 2014| Papers Haven

Mansour Alkhattabi
Case #5
Dr. Morgan

– According to InvestoPedia website (2014) the definition of the bill and hold strategy is “A method of conducting sales by billing the customer on the same day the transaction occurs, but not delivering the goods until a later date. Using the bill-and-hold basis is sometimes regarded as a controversial practice because allowing the seller to receive payment now, but making them wait a length of time before transferring the product could be used to inflate revenues meant for subsequent quarters”. Moreover, the accounting tools website mentions that about the bill and hold strategy “A bill and hold transaction is one in which the seller does not ship goods to the buyer, but still records the related revenue. The Securities and Exchange Commission (SEC) does not like this type of transaction, and does not usually allow it, since revenue is normally only recognized when goods are shipped to the buyer”. This strategy violates the revenue recognition principle because they recorded the revenue before the goods has been delivered. Sunbeam corporation convinced the retailers by offering huge discount to them for selling its electric blanket over the third quarter and offered to buy on account. However, the company used “bill and hold” strategy to maximize the company revenue. The retailer probably bought the products and paid for it and the company received the money, but the products are not delivered yet. The company could recognize the revenue and the gross profit in the third quarter, which originally should be recognized in the previous year.
– Because the company allowed the retailers to buy on account with high discount, the retailers were encouraged to buy more. This encouraging got the company to increase its account receivable. According to Accounting Tools website at (2014), to control the account receivable, the company has to have at least credit approval before shipment. I believe the company didn’t required that just to ease their sales to retailers.
– The declined happened in the next year because the revenues that had to be recognized over this year had recognized the year before. That behavior increased the year before which harmed the current year. Because the revenue of the previous year is recognized this year, the revenue of the previous one declined and the next one increased based on the increasing of the revenue for the current year.
– This type of earning management affects the quality by two influence. The first impact was increasing within the previous period with revenues that should be recognized through 1998. The second impact was deflating in 1998 because the revenues that should be occurring and recognized within 1998 had been recognized in 1997. That affects the accuracy of the reports that should be reflect the right transitions and the other process.

References

Accounting Tools. (2014). Account Receivable Controls. Retrieved from http://www.accountingtools.com/accounts-receivable-controls
Investopedia. (2014). Bill-And-Hold Basis. Retrieved from http://www.investopedia.com/terms/b/buy_and_hold_basis.asp

 

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