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Accounting: A Riff on Revenues 5 Views
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Transcript
- 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
Full Transcript
- 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
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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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