...TechMall.com: Revenue Recognition in the Internet Economy MEMO To: Doug Liddle, President From: Sheri Brinker Date: March 11th, 2011 ------------------------------------------------- Re: Revenue Recognition As we approach the close of the fiscal year, the following issues should be addressed in regards to our current revenue recognition policy: the use of gross versus net revenue, the recognition of setup fees, and potentially the recognition of revenue from the sale of technology to PlayBall.com. The following memo offers my solution in conformance with the FASB rules and regulations. First, it is in question whether TechMall should report revenue based on (a) the gross amount of earned revenue billed to a customer from the sale of the goods or services or (b) the net amount retained (that is, the amount billed to a customer less the amount paid to a supplier) due to the commission fee (FASB 605.45.45.1). This issue often arises with companies that sell goods or services over the Internet or offer services provided by a third-party vendor. Essentially, the process for making this determination boils down to evaluating the relationships between the supplier, the company, and the end customer. According to FASB 605.45.05.1, reporting revenue gross or net “depends on whether the entity functions as principal or agent.” Gross reporting treats the transaction as the company purchasing a product or service from the supplier and then selling that product...
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...and managers were splitting up into lunch groups and leaving the office, and she was without an invitation. However, she wasn’t surprised. After the report she had just presented to them, they had a lot to think about. The report was difficult for some to accept. First, the news wasn’t good. Second, she wasn’t able to answer a number of penetrating questions as to the exact reason that revenue was flat this last year for TechMall, nor could Sheri provide a rational plan for what needed to happen this upcoming year to reenergize the revenue line and improve profits. However, given the fact that her finance team had worked hard just to close the books and get the numbers to Sheri in time for the meeting, there had simply not been time to perform a thorough analysis of the unexpected results. At the end of the meeting, Doug Liddle, the CEO, announced that the group would reconvene in exactly one week to receive from Sheri a more complete analysis and her recommendations. Sheri knew that there would be a lot of tough questions at that next meeting, and the TechMall management certainly had a right to expect that their CFO would return with some good answers. She had a lot of work to do this week. The challenge for Sheri was that this analysis needed to focus on revenues. However, her accounting background, like that of most accounting professionals,...
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...industry characteristics or the current revenue recognition policies encourage manipulation of revenues? If so, how could Wareham manipulate its earnings? 3. For each of the specific contracts described in the case, please describe the best revenue recognition policy considering the criteria in SAB 101. (Onsetcom, Cataumet, Sandham, XLSemi, Technical Devices and Ashaban) TechMall.com’s Revenues Note Exhibit 3, Year 2 cash flows, the “add total change in cash” is an incorrect number. It should be $1,371,350. 1. What are the revenue streams for TechMall? 2. What drives each of the revenue streams and how much does Tech Mall expect to earn from each stream? 3. Given the level of activity in each revenue stream, compare the amount of revenue expected from each revenue stream with their actual revenue. Is TechMall getting their expected revenue from each of the revenues streams? 4. If actual revenue isn’t what TechMall expected, what might be causing the variation? 5. What can be done to better manage TechMall’s revenue? Great Dakota Bank: Online Banking 1. What are the advantages and disadvantages to Dakota Bank of the new online customers? (answer this questions without numbers) 2. Does it appear that the online customers add to Dakota’s bottom line? Compare the preliminary data to support your conclusion. Support your analysis using numbers given in the case. 3. Is the price of acquiring a new online customer worth the cost? Provide documentation using...
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