A report on blockbuster video commented that Blockbuster seems to have unsual success in opening new franchises during the Christmas season. It appears that during each of the past few years, product sales to new franchises have increased significantly in the fourth quarter. The report also noted, however, that Blockbuster recognizes revenue when products are shipped, and there is no indication that the new franchises receiving the merchandise were actually open for business. Blockbuster is not alone. US Robotics, which reports revenues when it ships items to dealers and wholesalers, has been criticized for puffing up reported sales by stuffing inventory into dealers.
1. How could the policy of recognizing revenue when products are shipped enable a company like Blockbuster or US Robotics to "manage" earnings?
2. Is recognizing revenue when products are shipped necessarily a violation of GAAP? Please explain.