Case Study Solution Income Reporting for Dot Coms
Reporting Income for Dot-Coms
Priceline.com
1. Under the current system of accounting, the company would record revenues of $250 as they are the merchants to the transaction and $200 (80% of transaction value) as their cost of goods sold.
2. Alternatively, the company can net off the effect and show $50 (20% of transaction value) as their commission revenue.
3. If I were the CFO, I would recommend to opt for the first method of revenue recognition because it would show better sales figures. But the second method would be in-line with the conservatism principle of revenue recognition as the agent is only earning the commission.
4. As a member of FASB, the second method would be recommended in accordance with the accounting principles of US GAAP.
StarMedia Network, Inc.
1. The company has the following 2 options for recording the $5.5 million of reciprocal advertising arrangements:
a) The first option would be to record revenues worth $5.5 million and also show advertising and marketing expenses of the same amount. It should be made sure that the estimate of such deals is done keeping by comparing them with other transactions of similar nature to value them at their fair cost. b) The second option would be not to show any revenue or expenses for reciprocal advertising expenses as their pricing may be inflated or not recorded at fair value.
2. As the first method of reporting might result in over estimation of revenues and misleading of investor information, it is recommended that the second method i.e. not reporting reciprocal advertising deals be adopted unless the company is absolutely sure of valuing such deals.
3. Being a member of FASB, I would recommend the same rationale of reporting as in Question 2.
Amazon.com
| Before | After | Net Sales | $1,639,839 | $1,639,839 | Cost of sales | $1,349,194 | $1,537,594 | Gross Profit | $290,645 | $102,245 | Operating Expenses: | | |
Priceline.com
1. Under the current system of accounting, the company would record revenues of $250 as they are the merchants to the transaction and $200 (80% of transaction value) as their cost of goods sold.
2. Alternatively, the company can net off the effect and show $50 (20% of transaction value) as their commission revenue.
3. If I were the CFO, I would recommend to opt for the first method of revenue recognition because it would show better sales figures. But the second method would be in-line with the conservatism principle of revenue recognition as the agent is only earning the commission.
4. As a member of FASB, the second method would be recommended in accordance with the accounting principles of US GAAP.
StarMedia Network, Inc.
1. The company has the following 2 options for recording the $5.5 million of reciprocal advertising arrangements:
a) The first option would be to record revenues worth $5.5 million and also show advertising and marketing expenses of the same amount. It should be made sure that the estimate of such deals is done keeping by comparing them with other transactions of similar nature to value them at their fair cost. b) The second option would be not to show any revenue or expenses for reciprocal advertising expenses as their pricing may be inflated or not recorded at fair value.
2. As the first method of reporting might result in over estimation of revenues and misleading of investor information, it is recommended that the second method i.e. not reporting reciprocal advertising deals be adopted unless the company is absolutely sure of valuing such deals.
3. Being a member of FASB, I would recommend the same rationale of reporting as in Question 2.
Amazon.com
| Before | After | Net Sales | $1,639,839 | $1,639,839 | Cost of sales | $1,349,194 | $1,537,594 | Gross Profit | $290,645 | $102,245 | Operating Expenses: | | |