Nortel Case

From analyzing the situation and information that has been provided, it could be noted that Robbins Inc. is a public company. This would mean that GAAP is a constraint when making a decision regarding the type of accounting policy that should be implemented when recognizing revenue. Those who would be concerned mainly in regards to the accounting policy chosen would be the auditors, the management and shareholders assuming the company's trades shares on the stock exchange. The auditors would be concerned regarding this because if appropriate policy is not used, revenue would be overstated and it would lead to a material change in the financial statements. The management would be concerned regarding the policy since it would affect their bonuses assuming it is based on net income. Finally an inappropriate accounting policy would mislead the shareholders when they analyze the financial statements and in making a decision in regards to investing in the company.

If the management changes its accounting policy as its auditors have requested, it would have no impact on the asset side of the balance sheet. This is because the consumer's purchase of the product would not affect accounts receivable on the asset side regardless of the accounting policy. An example of this would be if the product costs $20 which includes the cost of warranty then the A/R assuming the purchase was made on account would increase by $20 regardless. As for the liability side it would increase because a liability to the consumer exists when the product is sold until the warranty expires. Therefore a liability account (warranty