ProAudio Manufactures and Sells Audio and Video Conferencing Equipment

question 48

Essay

ProAudio manufactures and sells audio and video conferencing equipment.The company sells its products through a nationwide network of distributors complemented by a direct sales force.The distributors had a written agreement with ProAudio requiring the distributors to pay ProAudio within 90 days of receiving ProAudio products.The agreement also required distributors to take title to ProAudio products at the time the products left ProAudio's warehouse.
Through early 2014,ProAudio experienced robust growth and increased product sales every quarter.In early 2014,it became apparent to ProAudio's CEO,Linda Masters,that the company would not meet its sales and revenue projections for the quarter ended March 31,2014.At the end of March 2014,Masters instructed Seth Nein,ProAudio's Director of Manufacturing,to assemble enough products to ship to distributors in order to meet ProAudio's sales projections.Masters entered into an agreement with one of ProAudio's distributors,Astro Marketing,to accept these products.The management of Astro Marketing was assured that the transaction posed no risk to them.Masters also informed Astro management that Astro would not be required to pay for the merchandise until it was sold.Meanwhile,ProAudio recorded an account receivable and revenue for this sale.These same procedures were followed at the end of each quarter for which ProAudio anticipated falling short of its sales projections,including the recognition of revenue by ProAudio.
During this same time period,ProAudio,whose stock was publicly traded,was planning a private placement of additional shares of stock totaling $25.5 million.Accordingly,the stock price needed to remain high in order for the private placement to be attractive to investors.
Required:
Does the plan effected by Masters conform with Generally Accepted Accounting Principles (GAAP)?

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Definitions:

Inventory

Items held for sale in the ordinary course of business, or materials and supplies used or consumed in the production process.

Accounts Payable

Money owed by a company to its creditors or suppliers for goods and services received but not yet paid for.

Income Tax Expense

The cost incurred by businesses or individuals due to taxes on their income.

Income Taxes Payable

The amount of income tax a company owes to the government but has not yet paid.