Paul Jeter is a junior member of an audit team and his team is debating the impact of the client's right of return policy both on inventory valuation and revenue recognition. The assistant controller argues that there is no need to worry about the return policies since they have not changed in a while. The senior audit manager, Mark Irvine, wants a more authoritative answer and has asked Paul to conduct some research of the authoritative literature before he presses the point with client.
Questions:
1. What is the authoritative guidance for revenue recognition when right of return exists?
2. Sales with high rates of return can ultimately cause inventory to be misstate. Why are returns allowed? Should different industries be able to make different types of return policies?
3. In what situations would a reasonable estimate of returns be difficult to make?
Provide a proper citation of accounting concept and accounting standards codification.