Running head: WEEK 3 DISCUSSION 1

Week 3 Discussion
Name
Institution
Date
WEEK 3 DISCUSSION 2

Explain how MoviePlus would account for its revenue if it did follow GAAP. Should

MoviesPlus use GAAP? Do you see this as an ethical issue? Explain.

Revenue is the backbone of business performance. Everything centers on sales.

MoviePlus would be able to account for its revenue if it follows the Generally Accepted

Accounting Principle. To achieve this, MoviePlus has to apply the revenue recognition principle.

This principle is a combination of the matching principle and accrual accounting, which

stipulates that revenue is only recognized when they are realized and earned, and not necessarily

when received. By realizable, we mean that the services or goods have been received, but the

payments for the goods and services is expected at a later date. Therefore, MoviePlus must be

able to identify earned revenue, and this is because earned income accounts for services and

goods that have been performed and provided respectively. Also, MoviePlus must ensure that the

revenue generating activities have been primarily or fully completed before they include it as

revenue during that accounting period (Schipper et al., 2009). Also, there must be a realistic level

of confidence that the expected revenue will be received. Finally, through the use of matching

Principle, MoviePlus must ensure that all revenues and their associated costs must be reported in

that accounting period. Yes, this is an ethical issue because specific rules and regulations of a

business must be followed. Thus, by adhering to the GAAP, the business shows standards of

integrity, which is ethical.

Explain the meaning and importance of economic substance and how it relates to the

financial statements.

Economic substance is a transaction that has a drive other than the reduction of tax

liability. This concept is used in the checkup of tax shelters to see if they are abusing the tax

laws. Economic substance is important because the corporate structure of an organization must
WEEK 3 DISCUSSION 3

have real substance, ans should not be Conduit Company or empty shell. Hence, without

economic substance tax authorities would ignore the company’s optimized tax structure and the

organization would lose benefits provided by contracts for the evasion of double taxation

(Mathur & Singh, 2017). Economic substance is related to financial statements in that it ensures

that the financial statements offer an accurate, relevant, and complete image of events and

transactions.
WEEK 3 DISCUSSION 4

Reference

Schipper, K. A., Schrand, C. M., Shevlin, T., & Wilks, T. J. (2009). Reconsidering

revenue recognition. Accounting Horizons, 23(1), 55-68.

Mathur, A., & Singh, K. (2017). Economic substance requirements and multinational

firm behavior (No. 918310). American Enterprise Institute.