CHAPTER 5 Revenue Recognition and Profitability Analysis 299 2. Assume AuctionCo.com never takes control of this used bicycle before the sale. Instead, the bicycle is shipped directly to the customer by the original bicycle owner, and then AuctionCo.com pays $200 to the supplier. Under this assumption, how much revenue would AuctionCo.com recognize at the time of the sale to the customer? 3. Assume AuctionCo.com promises to pay $200 to the supplier regardless of whether the bicycle is sold, but the bicycle will continue to be shipped directly from the supplier to the customer. Under this assumption, how much revenue would Auction.com recognize at the time of the sale to the customer? EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and Exchange Commission (SEC). All publicly traded domestic companies use EDGAR to make the majority of their filings. (Some foreign companies file voluntarily.) Form 10-K, which includes the annual report, is required to be filed on EDGAR. The SEC makes this information available on the Internet. Required: 1. Access EDGAR on the Internet. The web address is www.sec.gov . 2. Search for the most recent 10-K’s of Orbitz and priceline.com . Search or scroll to find the revenue recognition note in the financial statements. 3. For each of the following types of revenue, indicate whether the amount shown in the income statement is “net” or “gross” (the terms used with respect to revenue recognition in the chapter), and briefly explain your answer. a. Orbitz’s “merchant model” revenues. b. Orbitz’s “retail model” revenues. c. Priceline.com ’s “merchant revenues for ‘Name Your Own Price’ ® services.” d. Priceline.com ’s “merchant retail services.” e. Priceline.com ’s agency revenues. 4. Consider your responses to 3a through 3e. Does it look like there is the potential for noncomparability when readers consider Orbitz and priceline.com ? Indicate “yes” or “no,” and briefly explain your answer. The birth of the Internet in the 1990s led to the creation of a new industry of online retailers such as Amazon, Overstock.com , and PC Mall, Inc. Many of these companies often act as intermediaries between the manufacturer and the customer without ever taking possession of the merchandise sold. Revenue recognition for this type of transaction has been controversial. Assume that Overstock.com sold you a product for $200 that cost $150. The company’s profit on the transaction clearly is $50. Should Overstock recognize $200 in revenue and $150 in cost of goods sold (the gross method), or should it recognize only the $50 in gross profit (the net method) as commission revenue? Required: 1. Access the FASB Accounting Standards Codification at the FASB website (asc.fasb.org). Determine the specific Codification citation that indicates the key consideration determining whether revenue gross versus net. (hint: this is related to principal versus agent considerations). 2. What indicators does the Codification list that suggest a net presentation is appropriate? Determine the specific Codification citation. 3. Using EDGAR ( www.sec.gov ), access Google, Inc. ’s 2013 10-K. Locate the disclosure note that discusses the company’s revenue recognition policy. 4. Does Google discuss determining whether they should report revenue on a gross versus net basis with respect to any of their products or services? What is the reason Google provides for its choices? Do you agree with Google’s reasoning? In May 2001, the Securities and Exchange Commission sued the former top executives at Sunbeam, charging the group with financial reporting fraud that allegedly cost investors billions in losses. Sunbeam Corporation is a recognized designer, manufacturer, and marketer of household and leisure products, including Coleman, Eastpak, First Alert, Grillmaster, Mixmaster, Mr. Coffee, Oster, Powermate, and Campingaz. In the mid-1990s, Sunbeam needed help: its profits had declined by over 80% percent, and in 1996, its stock price was down over 50% from its high. To the rescue: Albert Dunlap, also known as “Chainsaw Al” based on his reputation as a ruthless executive known for his ability to restructure and turn around troubled companies, largely by eliminating jobs. The strategy appeared to work. In 1997, Sunbeam’s revenues had risen by 18 percent. However, in April 1998, the brokerage firm of Paine Webber downgraded Sunbeam’s stock recommendation. Why the downgrade? Paine Webber had noticed unusually high accounts receivable, massive increases in sales of electric blankets in the third Real World Case 5–9 Principal agent considerations ● LO5–6 Research Case 5–10 FASB codification; locate and extract relevant information and authoritative support for a financial reporting issue; reporting revenue as a principal or as an agent ● LO5–6 CODE Real World Case 5–11 Chainsaw Al; revenue recognition and earnings management ● LO5–7
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