Question 1 MoviesPlus, Inc. is in its third year of business. The company offers

Question

Question 1

MoviesPlus, Inc. is in its third year of business. The company offers DVD rental to online customers for a fixed monthly fee. For $20 per month, a customer receives three DVDs each month, one at a time as the previous one is returned. No matter how many DVDs a customer uses (up to three), the fee is fixed at $20 per month. Customers sign a contract for a year, so MoviesPlus recognizes sales revenue of $240 each time a customer signs up for the service. The owner of MoviesPlus, Bob Colbert, has heard about GAAP, but he does not see any reason to follow these accounting principles. Although MoviesPlus is not publicly traded, Bob does put the company’s financial statements on the company’s Web page for customers to see. Explain how MoviesPlus would account for its revenue if it did follow GAAP. Explain to Bob Colbert why he should use GAAP, and describe why his financial statements may now be misleading. Do you see this as an ethical issue? Explain.

Question 2.

You are a business consultant providing information and advice to future small business owners. One difficult concept for your clients to understand is the concept of economic substance. Accountants do not base the recognition of revenues and expenses on the income statement on the collection of cash or on the disbursement of cash. Revenues and expenses are recognized when the economic substance of the transaction has taken place. Create a PowerPoint presentation for a seminar aimed at future business owners. Explain the meaning and importance of economic substance and how it relates to the financial statements.

Please provide references if possible .

Please help me!!!!!

Thanks inadvance

Explanation / Answer

Answer 1 The use of GAAP is not mandatory for all businesses, but the U.S. Securities and Exchange Commission (SEC) requires publicly traded and regulated companies to follow GAAP for the purpose of financial reporting.

Financial statements prepared under GAAP are intended to reflect an economic reality, GAAP makes a company's financials comparable and understandable so that investors, creditors and others can make financial decisions. In order to be useful and helpful to users, GAAP requires information on financial statements to be relevant, reliable, comparable and consistent.

GAAP includes principles on:

In the present case,although Moviesplus is not publicly traded but following GAAP will help in better presentation of financial statements.Putting companies financial information on companies web page does not provide clear understanding to the users,moreover,every information is not relevant to users.Following GAAP provides specific information to the users of financial statements.It also ensures that practices are legal and ethical

  Revenue should be allocated over the entire span of its income/expenditure and not just on the final date of a transaction
Therefore it is not mandatory for Moviesplus to follow GAAP principals but in the interest of the company as well as customers and for better understanding of financial statment,it is shall follow GAAP.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.