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Accounting: A Riff on Revenues 5 Views


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00:00

Accounting Allah shmoop riff on revenues So when is a

00:07

dollar of revenue a dollar of revenue All right well

00:10

let's start Simple Not that simple Okay here we go

00:13

You own the simplest lemonade stand in the world You

00:16

sell drinks on ly for cash and for a dollar

00:19

a drink At the end of each day you add

00:21

up the number of dollar bills in your shoebox and

00:23

you call that revenues And that would be accurate and

00:26

a good way of accounting for your revenues In this

00:29

context you collected the dollar Essentially nobody is going to

00:33

ask for it back by the end of the day

00:34

because you have no money back guarantee no credit risk

00:37

Simple But what if you guaranteed people that if they

00:40

bought the drink and didn't feel happy about their lemonade

00:44

drinking experience for at least the next thirty days well

00:47

then they'd get their money back And you still recognize

00:49

the dollar in your shoebox as revenue answer No You'll

00:53

have to wait thirty days before you can recognise those

00:56

dollars sales fully as revenues when those dollars are a

00:59

buffer against the liability of people returning to you twenty

01:02

nine days later noting that they aren't happy dappy and

01:06

they want their money back Will That noted after thirty

01:08

days I eat on the thirty five first day after

01:11

that last sale Then from an accounting perspective you can

01:15

in fact then recognized that dollar of sales as revenue

01:19

But most companies aren't this simple There have been some

01:21

famous examples in history on both sides of the revenue

01:24

recognition conservation line Remember that Gap Accounting requires accountants to

01:29

adopt the most conservative approach in accessing the profitability of

01:33

a given company Well at the extreme conservative end of

01:36

the Gap spectrum Microsoft in its payday was making so

01:40

much hay for money and paying so much in taxes

01:44

that they offered a three year money back guarantee with

01:46

their Windows operating system And even though they collected the

01:49

cash upfront note that the cash flow of Microsoft would

01:53

then be massive and massively higher than their earnings And

01:56

it wass they did not recognize those revenues until three

01:59

years later While cash flow from Windows in a given

02:02

year might have been five billion dollars the stated revenues

02:05

from that product might have only been two billion This

02:08

was such an extremely conservative accounting approach that Microsoft actually

02:12

got censured by the accounting regulatory body for being too

02:16

conservative in their accounting You could imagine that this is

02:19

a rarity in the real world Most companies account in

02:22

the opposite direction I eat They take too aggressive and

02:25

approach in recognizing revenues because everybody likes to be a

02:28

hero to the maddening crowds on Wall Street And delaying

02:32

recognizing revenues often means that companies would show gap earnings

02:36

losses instead of gap earnings or profits Why on earth

02:40

would a company so aggressively delay the recognition of revenues

02:44

on purpose like who's going to return an operating system

02:47

for a money back guarantee when they were essentially no

02:50

other options While the time Microsoft had a monopoly on

02:53

that business and well Microsoft did it to make their

02:56

company look less profitable they were worried about government anti

03:00

monopoly regulators raining on their parade They did They wanted

03:04

to defer taxable income which they did And they wanted

03:07

to smooth earnings knowing that business would not always be

03:11

oh so awesome and Rosie and that they could probably

03:14

use those deferred revenues Some rainy day down the line

03:17

well Eventually the chicken ary caught up with Microsoft and

03:20

aim or less ground in their own profits and a

03:23

judge chastise them for being too conservative in their accounting

03:26

a rare phenomenon But it happened The broader point is

03:29

that money you collect isn't always revenues And in the

03:32

real world there are a lot of ways of you

03:34

know tweaking no tweaking the other Not so conservative End

03:39

of the Rainbow would look something like this Funky levin

03:42

dot com offers a one year membership for two hundred

03:45

forty dollars which gives tickets into every gym facility and

03:49

nightclub any time a customer can show a valid pass

03:52

to the burly bouncer at the door Well the sign

03:54

up process for funky lovin is really easy and the

03:57

product is marketed as being of thirteen month duration where

04:01

for only one dollars a customer can sign up Initially

04:04

the aggressive accountant waits until the credit card has been

04:07

processed for the sale of that one dollars And then

04:10

that accountant recognizes all of the Revenue III all two

04:14

hundred forty one dollars of it as having been earned

04:17

by the company that moment Is it legal Well if

04:20

there is no money back guarantee and a customer whether

04:22

they like it or not has filled out the forms

04:25

properly and knowingly and their credit card works then yeah

04:28

they're on the hook for two forty one It's probably

04:30

legal But what are the odds that at least some

04:33

customers end up wanting their money back after the first

04:35

month And what are the odds that some customers canceled

04:38

their credit card part way through the year And what

04:41

are the odds that within the next year U S

04:43

currency will lose all value and people will only be

04:46

paying for things with Bitcoin You know right Well that

04:48

one's low but something think about so companies will view

04:51

accounting in different forms and formats largely based on the

04:54

culture of the company itself Are they slimy Mixed lime

04:57

person or Utah Boy Scouts hoping to present a picture

05:00

of the business that suits the needs of management So

05:02

yeah two ends of the rainbow to keep in mind

05:05

when you're doing your accounting There's everything from uber Conservative

05:08

Accounting is in the case of Microsoft to the very

05:11

aggressive accounting style of micro hard Yeah that company did 00:05:15.95 --> [endTime] not last very long Hey

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