Principles of Finance: Unit 3, When Are Revenues Revenues?

Revenue is the money you take in from selling your product or service. But... what about when there are exchanges? Returns? Bounced checks? Counterfeit fivers?

CoursesFinance Concepts
Principles of Finance
FinanceFinancial Responsibility
Personal Finance
Finance and EconomicsPrinciples of Finance
LanguageEnglish Language
Life SkillsPersonal Finance
SubjectsFinance and Economics

Transcript

00:25

bought the drink and didn't feel happy for at least the next 30 days to get

00:31

their money back. can you still recognize that dollar in

00:34

your shoe box as revenue? no .ha. you have to wait 30 days .those dollars are a [dollar bills on a table]

00:39

buffer against the liability of people returning to you 29 days later noting

00:45

that they aren't happy Daffy and wanting their dollar back. right well that noted

00:49

after 30 days I young the 31st day after the last sale you can in fact then

00:53

recognize that dollar of sales as revenue. sound goofy ?well in fact he

00:59

wants great Microsoft Corporation did the above with guarantee on their

01:02

operating systems in the mid-1990s. in essence so that they didn't have to

01:06

recognize revenues right away and their guarantee was for almost a yea.r

01:11

oh why on earth would a company do that on purpose? like who's gonna return an

01:15

operating system for a money-back guarantee when there were no other

01:18

options and really no other way to run your computer if you didn't have one.

01:22

well at the time Microsoft had a monopoly on the operating system [woman folds arms behind a counter as someone pitches the new operating system to her]

01:25

business. Microsoft did it to make their company purposely look less profitable

01:31

they were worried about government anti-monopoly regulators raining on

01:35

their parade, and they wanted to defer taxable income to you know smooth

01:40

earnings and pay less taxes, knowing that business wouldn't always be oh so

01:44

awesome and that they could probably use those deferred revenues for a rainy day

01:48

someday. well eventually it rained so hard on

01:51

Microsoft they more or less drowned, and a judge chastised them for being too

01:56

conservative in their accounting. rare phenomenon almost first time in history

02:00

that's ever happened, but it happened. well the broader point is that revenues

02:03

aren't always revenues in the real world and there are lots of ways of capturing

02:07

them. all right let's say your lemonade stand took credit cards and you set up a

02:12

deal with Visa and MasterCard they took a nickel for each sale of a [credit card swiped]

02:15

dollar that you made, yes we're vastly oversimplifying here but just go with us.

02:19

when you report revenues do you report a dollar and then have a nickel of cost

02:23

always? or do you report ninety five cents as your revenues? well in this case

02:27

you report a dollar and just deal with credit card processing costs as an

02:31

expense line-item forever. why? because if you didn't it would cloud things. one

02:37

could then ask why do some lemonade sell for a dollar and others sell for 95

02:43

cents? like some people paid cash some paid credit cards. Ever note that a lot of

02:46

restaurants and other small businesses charge you extra if you charge like Visa

02:52

or MasterCard versus just paying them in cash? well it's clear accounting to show [payment policy document shown]

02:56

your work. at least in this case but here's another rub eBay offers a bunch

03:00

of merchandise for sale in its garage sale like environment. it sells a

03:05

slightly used six thousand dollar hot tub for fifteen hundred bucks but eBay

03:10

doesn't own the hot tub that's getting sold. they're just the listing agent

03:14

behind the sale for which they take a commission. call it five percent in this

03:18

case that would be seventy five bucks for the tub. and yes again we're vastly

03:22

over simplifying here but go with us .so E Bay report fifteen hundred as revenues

03:26

or seventy five while in reality it reports both but former is reported as

03:30

gross merchandise, not that gross and then they more or less well ignore the

03:35

numbers and the rest of their income statement. why would eBay do this ?because

03:38

gross merchandise is a very good proxy or indicator of future commissions [Teddy bear put in a box]

03:44

likely coming eBay's way. it's also good as a check point for what the commission

03:49

rates actually were. like if you're an ebay powerseller you'll know that real

03:53

commission prices are all over the map and higher rates would be an indicator

03:56

that eBay has more power with the selling community. one other perspective

04:00

is worth thinking about here people. after a seventy five dollar sale eBay

04:03

has a bunch of costs keeping the website up ,lawyers tracking fig bars for the

04:08

snack area and so on. so on that $75 sale eBay might have twenty five dollars in

04:13

pre-tax profits. well on seventy five bucks of revenues twenty five dollars in

04:17

pre-tax profits is a thirty three percent margin business. pretty high

04:21

margin business and it kinda fits in with the margin structure

04:25

of other analogous software companies. well how weird would it have been to

04:30

have shown $1500 as revenues and then show $25.00 in pre-tax profits. you go [ebay income statement shown]

04:36

from a 33% margin business to being uh what is that about 1.7 percent margin

04:41

business well whenever you see oddball numbers like this listen to your dark

04:47

side. ya know at the time of eBay's IPO there were a lot of commerce companies

04:53

out there who had no real earnings or no prayers of ever having them.

04:57

how were they valued by savvy Wall Street investors well just as a multiple

05:01

of revenues so if you showed hugely high revenues, well then relative to lemonade

05:07

stand.com you were cheap according to Wall Street standards in reality eBay

05:11

actually had real earnings or profits over time and didn't need the on a

05:16

revenue multiple basis worth cheap that sleazy marketing things that a lot of

05:21

companies adopted. yeah karma it's alive. all of those companies now are long dead

05:27

and buried. [headstone pictured]