Clarity Communications 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 Clarity requiring the distributors to pay Clarity within 90 days of receiving Clarity products. The agreement also required distributors to take title to Clarity products at the time the products left Clarity's warehouse.
Through early 2011, Clarity experienced robust growth and increased product sales every quarter. In early 2011, it became apparent to Clarity's CEO, Melinda Waters, that the company would not meet its sales and revenue projections for the quarter ended March 31, 2011. At the end of March 2011, Waters instructed Phillip Potts, Clarity's Director of Manufacturing, to assemble enough products to ship to distributors in order to meet Clarity's sales projections. Waters entered into an agreement with one of Clarity's distributors, Star Marketing, to accept these products. The management of Star Marketing was assured that the transaction posed no risk to them. Waters also informed Star management that Star would not be required to pay for the merchandise until it was sold. Meanwhile, Clarity recorded an account receivable and revenue for this sale. These same procedures were followed at the end of each quarter for which Clarity anticipated falling short of its sales projections, including the recognition of revenue by Clarity.
During this same time period, Clarity, 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 Waters conform with Generally Accepted Accounting Principles (GAAP)?

Question

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The Answer of Clarity Communications 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 Clarity requiring the distributors to pay Clarity within 90 days of receiving Clarity products. The agreement also required distributors to take title to Clarity products at the time the products left Clarity's warehouse.
Through early 2011, Clarity experienced robust growth and increased product sales every quarter. In early 2011, it became apparent to Clarity's CEO, Melinda Waters, that the company would not meet its sales and revenue projections for the quarter ended March 31, 2011. At the end of March 2011, Waters instructed Phillip Potts, Clarity's Director of Manufacturing, to assemble enough products to ship to distributors in order to meet Clarity's sales projections. Waters entered into an agreement with one of Clarity's distributors, Star Marketing, to accept these products. The management of Star Marketing was assured that the transaction posed no risk to them. Waters also informed Star management that Star would not be required to pay for the merchandise until it was sold. Meanwhile, Clarity recorded an account receivable and revenue for this sale. These same procedures were followed at the end of each quarter for which Clarity anticipated falling short of its sales projections, including the recognition of revenue by Clarity.
During this same time period, Clarity, 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 Waters conform with Generally Accepted Accounting Principles (GAAP)?

Clarity Communications Manufactures and Sells Audio and Video Conferencing Equipment