1. Analyze the transactions with both distributors with respect to revenue recognition and how the CFO explained the position of Biotech. Was revenue recognized properly under GAAP? Why or why not?
2. How would you characterize the motivation of Biotech for the way it recorded the transactions? What was the effect on the way earnings were recorded?
3. How would you explain Biotech's responsibilities under SOX? 
4. Assume Roberts is attempting to determine the firm's possible liability for recklessness or fraud depending on whether it accepts the client's explanations. How might she go about the analysis?

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Sales to Distributor 2 on December 30, 2021 An order for the purchase of $400,000 product of Biotech on December 1, 2021 by Distributor 2 contained the terms of payment as net 30 days or due by December 31, 2021. The product was to be shipped on December 20, 2021. Distributor 2 informed Biotech that because it was a start-up company, it wouldn't be able to pay by that date and maybe for at least 60 days thereafter. Biotech then came up with an arrangement whereby Distributor 2 could return the product anytime during the 60-day period, with no questions asked, and be credited for its account payable. Distributor 2 agreed to buy the product based on these terms and Biotech recorded the $400,000 as revenue on December 20, 2021, the shipping date. Biotech's Arguments for Recording the Revenue in Fiscal-Year End December 31, 2021 The CFO of Biotech explained why revenue should be recorded on the sale of product to both distributors as follows. Revenue from the product shipped to Distributor 1 by year-end could be recognized on the shipping date. The fact that the Distributor could return it next year was nothing new. The sale of any product to a customer could be returned after purchase. The product shipped to Distributor 2 occurred on December 20, 2021, before year-end, so revenue could be recorded on that date. The sale of any product to a customer could be returned after purchase. The fact that the return would be credited with no questions asked was standard company policy. Helen Roberts is preparing to meet with the CFO of Biotech to discuss these transactions and the way revenue has been recognized. Answer the following questions to help her prepare for the meeting. Sales to Distributor 2 on December 30, 2021 An order for the purchase of $400,000 product of Biotech on December 1, 2021 by Distributor 2 contained the terms of payment as net 30 days or due by December 31, 2021. The product was to be shipped on December 20, 2021. Distributor 2 informed Biotech that because it was a start-up company, it wouldn't be able to pay by that date and maybe for at least 60 days thereafter. Biotech then came up with an arrangement whereby Distributor 2 could return the product anytime during the 60-day period, with no questions asked, and be credited for its account payable. Distributor 2 agreed to buy the product based on these terms and Biotech recorded the $400,000 as revenue on December 20, 2021, the shipping date. Biotech's Arguments for Recording the Revenue in Fiscal-Year End December 31, 2021 The CFO of Biotech explained why revenue should be recorded on the sale of product to both distributors as follows. Revenue from the product shipped to Distributor 1 by year-end could be recognized on the shipping date. The fact that the Distributor could return it next year was nothing new. The sale of any product to a customer could be returned after purchase. The product shipped to Distributor 2 occurred on December 20, 2021, before year-end, so revenue could be recorded on that date. The sale of any product to a customer could be returned after purchase. The fact that the return would be credited with no questions asked was standard company policy. Helen Roberts is preparing to meet with the CFO of Biotech to discuss these transactions and the way revenue has been recognized. Answer the following questions to help her prepare for the meeting.

Answer rating: 100% (QA)

A Revenue was not recognized properly under GAAP as there was no proof that the product shipped to D... View the full answer