Managers of various companies’ products increase the value of their sales by forcing extra products through their supply channel. This can occur as an intentional plan of management in order to increase sales revenue…
This can occur as an intentional plan of management in order to increase sales revenue. The incentives as to why managers would resort to extreme earnings management technique such as Channel stuffing include, First is to increase earnings, in given instances, managers and sales personnel are paid commissions and bonuses based on the overall performance of the company and since extreme earnings management technique such as channel stuffing increases sales volumes thereby having a positive result in relation to sales (LAI, et, al. 2009). This increases their earnings. This technique also creates some sense that the performance of the company is well hence in some ways assist in attracting financial institutions and investors to continue investing in the company with a hope of better proceeds (LAI, et, al. 2009). Secondly, these techniques do help a company to have a competitive advantage over their rivals. This is achieved by making sure that jamming effect is achieved for instance constant premature shipment of products into the market (LAI, et, al. 2009). This will give their competitor hard time to sell their products due to so many goods being offered in the market through this technique. Therefore the second reason gives a clear picture of how an organization can benefit from this technique which shows a well organized team of management (BRIGHAM, et, al 2010). Sales maximization will be achieved through these techniques and hence issues related to forecast analysis will be able to be achieved by the company. Thirdly is that the given company will be able to enjoy large scale production of goods and services and also distribute large volumes of the company’s product (BRIGHAM, et, al 2010). The effect of this is that the company will cut down their production costs that are fixed or variable because of the advantages associated with large scale production and hence higher returns (BRIGHAM, et, al 2010). This therefore helps managers in minimizing cost of production by producing and distributing large volumes of goods that results in low cost operations. The effect on this on the financial statement is that the company is guaranteed of good profits as will be reflected on the statements since the main objective of any business is to look for ways of reducing operational cost while maximizing profit (BRIGHAM, et, al 2010). The fourth reason is that the company may want to increase its proceeds from initial public offer. Most companies do raise their capital through initial public offer and so in order to gain the trust from the public, it has to indicate to the public that it is able to make high returns (LAI, et, al. 2009). This is because no investor would want to place its money in the company that will go down very soon. In order to gain such trust, the company has to be able to produce goods and services that can meet the demand in the market (LAI, et, al. 2009). Effectiveness of stuffing the channel from the stand point of a single year From the stand point of a single year, stuffing the channel seems effective because it is hard to detect and given that such can only be identified in the course of full disclosure, such as sales by product, segment, or area. Through careful analysis, the company will be able to reveal abnormal sales patterns. Nevertheless, it is not a guarantee for the company to provide full disclosure unless the auditor insists or as stipulated by (BHATTACHARYYA, H. 2004). Incase of too much inventory, wholesalers can refuse to stock more inventory since they are not formally company employees. It is also difficult to keep these wholesalers from complaining to regulators. In order to avoid such complaints, the company can resort to ...
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