Restating Revenues and Earnings at INVESTools Inc. Essay

1508 Words Sep 10th, 2014 7 Pages
1. Years Ended December 31, 2004 2003 2002
Revenue (pre-tax) $99.6 $73.4 $56.1
Cost of sales (Revenue x 40%) ($39.8) ($29.4) ($22.4)
Selling expense ($23.3) ($18.5) ($17.5)
General and Administrative expense ($19.9) ($13.2) ($14.2)
Depreciation and Amortization ($0.9) ($0.6) ($0.7)
Other Income (expense) $0.0 ($1.4) $0.2
Net profit (loss)--GAAP $15.7 $10.3 $1.5 Add back amount eligible for capitalization
Under SAB 104 (40% of total costs X 85%) $33.9 $25.0 $19.1 Adjusted Net Income (loss) Reported Internally $49.5 $35.3 $20.5

INVESTools should definitely capitalize these expenses. The practice of not capitalizing these expenses has led to routine recording of net losses
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4. Currently management has two problems on their hands. The first and most pressing is the fact that they have to issue a restatement of previous years’ financial statements due to accounting errors associated with premature revenue recognition. The second problem, which may have contributed to the first problem, is the fact that the company’s revenue streams are drastically changing and they hope that they continue to evolve into lifetime revenue streams, which unfortunately defer revenue significantly. This change in revenue streams and the associated recognition of that revenue, at the appropriate time, has caused INVESTools the issue of having to make the restatement. Since both issues need to be addressed and can be at the same time, it might be in the company’s best interest to do so simultaneously. The company historically chose not to capitalize most expenses that could have been capitalized under SAB 104 since their business didn’t rely on many deferred revenue streams at the time. The company would have undoubtedly preferred to change their policy for expensing deferred-revenue contracts were it not for the SEC’s preference that such costs were treated consistently and for the additional fact that they would have to make their case to the SEC, gain their approval, and restate all previous year’s financial statements. Now that the company is facing having to restate past financial statements, they might as well approach
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