Reference no: EM132692065

Sood Supplies is in the business of selling electronic components to computer manufacturers. Sood Supplies' financial statements are issued on an annual basis for a large number of users, such as investors and the bank. The financial reporting of the company is based on ASPE. Prior to the issuance of the current year's financial statements, the head of engineering and the accounting manager had a discussion regarding the amount of warranty expense that should be recognized for the year. The head of engineering believes that only 2% of sales needs to be calculated as a provision for the warranty expense, while the accounting manager believes that 6% of sales should be recorded as an expense. The accounting manager argues that the 6% is estimated based on historical trends of the company and the industry; however, the engineering department claims that its new method of quality assurance will reduce the future warranty expenses. The engineering department could not submit any documents to support the claim. Eventually, the accounting manager decides to trust the engineering department and uses the 2% calculation.

Problem 1: Do you believe any of the qualitative characteristics of financial accounting or related considerations have been violated by Sood Supplies? Explain.