Vitamix Revenue Recognition – “Special Cases”
Proper revenue recognition is important in because it has a direct impact on quarterly income statements, incentive calculations, investor confidence, and perception of an organizations financial health. The scandals at Enron and WorldCom illustrate how important properly recognize revenue is to the financial integrity of a company and how abuse can be extremely dangerous. (Labaton, 2006) To maintain consistency across organizations, the Securities and Exchange Commission (SEC) relies on the standards published by the Financial Accounting Standards Board (FASB) to establish the guidelines for revenue recognition. (FASB, 2011)
Companies can only recognize revenue if it is both realized and…show more content…
The extended service plan does not start until after the factory warranty expires.
Should Vitamix recognize the revenue received from the sale immediately or at the time when the factory warranty expires?
Vitamix should recognize the revenue immediately because the cost of servicing the extended warranty can be reasonably calculated. The accounting team calculates the costs associated with servicing this warranty based on historical averages and accrues for it as a percentage of sales. Since we can estimate the cost, we can therefore produce an accurate net revenue amount because this amount is a conservative and reasonable amount of the realized and earned revenue. (Connors, 2011)
Household Show Consignment Sales
To show the versatility and power of the Vitamix product, the company frequently demonstrates their machines at large retail locations. The retailer requires that they ship pallets of product to various retail stores and then Vitamix contracts with independent contractors to demonstrate the product. However, the retailer does not purchase the machines at that time, but requires that Vitamix manage that inventory for them. When a customer of the retailer wishes to purchase the machine, they take a machine along with any other products they wish to purchase to the retailers point of sale. The retailer sends Vitamix a purchase order for the machines processed through their point of sale system on a daily basis.