Simulation. From 1995 to 2006, Vitesse Semicoductor Corporation and its executives engaged In discussions with Nu Horizons concerning the executives of a product distribution agreement between the two companies. After several weeks of negociations, Vitesse and Nu Horizons executed an Authorized Preferred Distributor Agreement(DistributionAgreement).Under the Distribution Agreement, Vitesse was to ship to Nu Horizons certain product for which Vitesse had already identified customer demand.Vitesse actually shipped, however, product whatever product it had manufactured without any consideration for Nu Horizons existing or forecast demand.Vitesse, moreover, granted Nu Horizons an unfettered right of return on this inventory.From September 2001 through April 2006, Vitesse routinely used its relationship with Nu Horizons to wrongly record revenue on such shipments and correspondingly failed to reduce revenue and accounts receivable was product was return.From 2001 to 2006, Tomasetta, Hovanec, Mody, and Kaplan routinely instructed sales and finance staff to delay record In credits on return Vitesse product.Both Tomasetta and Hovanec knew that this delay In timely record In credits would cause revenue to be overstated.As a result of its failure to timely record customer credits, Vitesse's accounts receivable balances grew and aged.In order for Vitesse to hide its improper revenue recognition practices related to the ISP and QSPS From its Auditor, Vitesse needed cash to conceal the true age of its old accounts receivable balances.In order to conceal the aged balances of Nu Horizons' invalid accounts receivable From the Auditor during its field work, Hovanec and Kaplan routinely instructed lower level finance employees to improperly post cash receipts From other customers to the oldest of Nu Horizons' accounts receivable.After the Auditor ' s field work was completed, Kaplan instructed.
Part 1: Explain to a jury the basic accounting of record In sales on credits, recording returns before the payments have been made, and receivable allowances. Explain it.Specifically,
1. Describe when a sales should be record, and given the sales is record, how the return should be record.
2. Explain the difference between how things would look if the sale and return are made in the same period (quarter)vs. in different period. A numerical example might be helful here.
3. Explain how a company should value receivable if it is uses an aging of receivable.
Part 2: Describe to the jury Vitesse's violations of your descriptoons above and the implications for the income statement and balance sheet.