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Let’s break down the example of Fashion Fusion in more detail.
1. Revenue to be Recognized:
2. Refund Liability:
3. Cost of Goods Sold (COGS):
4. Right to Returned Goods (Inventory Treatment):
5. Recovery Costs Charged to Profit & Loss (P&L):
These calculations are based on the matching principle, where revenue is recognized net of expected returns, and the balance sheet reflects both the refund liability and the right to returned goods, ensuring that Fashion Fusion’s financials accurately account for the potential returns and recovery costs.