AOL case study
Dr. Maddah
ENMG 602 Intro. to Financial Eng’g
11/03/08
Using the Accounting Framework: AOL (Chapter 5, Antle)
• AOL’s business environment
America Online was the leader in providing internet connections in 1997 with 8.6 million subscribers.
AOL had two sources of revenue (i) online service revenue generated from customer subscription to online service, and
(ii) other revenues from e-commerce and advertising.
Rapid changes occurred in the manner in which subscription revenue was generated which shifted AOL strategy to focusing on increasing nonsubscription revenues.
Nonsubscription revenues are difficult to estimate.
Revenue uncertainty was combined with fierce competition.
However, AOL’s revenue was growing rapidly (from $39 million in 1992 to $1.6 billion in 1997).
• AOL’s balance sheet
Looking at AOL’s balance sheets on June 30 1996 and 1997, total assets declined by around $112 million over the period.
This can be serious for a growing internet company.
What happened? o AOL may have incurred heavy losses due to competition. o AOL may have distributed assets to shareholders. o AOL may have used assets to pay debt.
1
Since liabilities increased by $273, we can rule out that AOL used assets to pay off debt.
The accounting identity tells us that stockholder’s equity should have declined. It did decrease by $385 million.
A closer look at shareholder’s equity indicates that AOL issued additional common stocks leading to an increase of
$98 million in par and addition paid-in capital.
2
Another equity account, unrealized gain on available-forsale securities also increased by $17 million.
The decrease in equity came from a decrease in accumulated deficit (retained earnings) of $499 million, from ($8) to ($507) million.
This indicates that no dividend was paid in 1997.
The income statement will help explain this decrease.
• AOL’s income statement
Looking at AOL’s income statement for the period June 30
1996 – June 30,
ENMG 602 Intro. to Financial Eng’g
11/03/08
Using the Accounting Framework: AOL (Chapter 5, Antle)
• AOL’s business environment
America Online was the leader in providing internet connections in 1997 with 8.6 million subscribers.
AOL had two sources of revenue (i) online service revenue generated from customer subscription to online service, and
(ii) other revenues from e-commerce and advertising.
Rapid changes occurred in the manner in which subscription revenue was generated which shifted AOL strategy to focusing on increasing nonsubscription revenues.
Nonsubscription revenues are difficult to estimate.
Revenue uncertainty was combined with fierce competition.
However, AOL’s revenue was growing rapidly (from $39 million in 1992 to $1.6 billion in 1997).
• AOL’s balance sheet
Looking at AOL’s balance sheets on June 30 1996 and 1997, total assets declined by around $112 million over the period.
This can be serious for a growing internet company.
What happened? o AOL may have incurred heavy losses due to competition. o AOL may have distributed assets to shareholders. o AOL may have used assets to pay debt.
1
Since liabilities increased by $273, we can rule out that AOL used assets to pay off debt.
The accounting identity tells us that stockholder’s equity should have declined. It did decrease by $385 million.
A closer look at shareholder’s equity indicates that AOL issued additional common stocks leading to an increase of
$98 million in par and addition paid-in capital.
2
Another equity account, unrealized gain on available-forsale securities also increased by $17 million.
The decrease in equity came from a decrease in accumulated deficit (retained earnings) of $499 million, from ($8) to ($507) million.
This indicates that no dividend was paid in 1997.
The income statement will help explain this decrease.
• AOL’s income statement
Looking at AOL’s income statement for the period June 30
1996 – June 30,