Which description reflects channel stuffing as revenue recognition fraud?

• A. Recognizing revenue on shipments to distributors when control has not transferred.
• B. Billing for goods not delivered but recognized as revenue.
• C. Shipping excess stock to distributors to inflate current-period revenue before legitimate demand exists.
• D. Recording revenue only when cash is received.

Answer: (C)

Channel stuffing is when a company boosts current-period revenue by shipping more product into its distribution channel than the market can absorb, and then recognizing that revenue in the same period even though legitimate demand hasn’t existed yet. The key idea is using the distribution channel to pull in revenue early—goods are sent to distributors and revenue is booked on those shipments rather than on actual end-customer sales, which distorts earnings and can leave the company with excess or returnable inventory later. This describes inflating current-period revenue before real demand exists, which is the essence of the fraud.

Other scenarios miss that specific mechanism. Recognizing revenue on shipments before control transfers is a potential issue in revenue timing, but channel stuffing centers on flooding the channel with excess inventory to artificially inflate current-period results. Billing for goods not delivered describes fictitious revenue, a different type of fraud, and recording revenue only when cash is received aligns with cash-basis practices, not the accrual-based manipulation channel stuffing targets.