Many companies sell products allowing their customers the right to return merchandise if they are not satisfied. Because the return of merchandise can retroactively negate the benefits of having made a sale, the seller must meet certain criteria before revenue is recognized in situations when the right of return exists. Generally, accepted accounting principles list the criteria, the most critical of which is that the seller must be able to make reliable estimates of future returns.
1. Obtain the relevant authoritative literature on accounting for the right to return merchandise using the FASB's Codification Research System. You might gain access at the FASB website (www.fasb.org), from your school library, or some other source.
2. What factors do generally accepted accounting principles discuss that may impair the ability to make a reasonable estimate of returns? Cite the reference location regarding these factors.
3. List the criteria that must be met before revenue can be recognized when the right of return exists.
4. Using EDGAR (www.sec.gov) access the 10-K reports for the most recent fiscal year for Hewlett-Packard Company and for Advanced Micro Devices, Inc. Search for the revenue recognition policy to determine when these two companies recognize revenue for product sales allowing customers the right of return.
5. Using your answers to requirements 2 and 3, speculate as to why the two revenue recognition policies differ.