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
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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?
Revenue Recognition
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
Overview
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.
Should
* Full revenue recognition method would recognize total revenue and total cost at the date of sale. Adjustments will be recognized when the warranty is used in the contract period, giving by the FASB’s Statement of Financial Accounting Concept No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises”. When revenue is recognized and at the end of initial
Coverage of revenue recognition in intermediate accounting courses is typically limited to learning and applying the criteria for revenue recognition outlined in the Financial Accounting
Financial reporting practices and ethics have manifested an ocean of literature. This has mainly come from organization theorists that address accounting practices. These theorists and professionals have given fresh accountability measures. Their ideals give this industry the tools needed to survive, grow and prosper. The way an organization prepares and reports its financial information and handles its daily operations is in essence financial practices, and in the way it accomplishes this reveals their ethical standards to which they adhere to. This paper will discuss the financial practices, ethical standards, and
SFAC No. 8 addresses the cost constraint on useful financial reporting, “Cost is a pervasive constraint that standard setters, as well as providers and users of financial information, should keep in mind when considering the benefits of a financial reporting requirement.” (SFAC No. 8 BC 3.47) However, the ability to place a dollar value and fully enumerate a cost or benefit is almost an impossible task for standard-setters. Additionally, there is no way to successfully identify and measure all of the economic consequences associated with a new standard. The FASB should be applauded though for advancing uniformity in accounting standards, however; uniform financial reporting suggests a one size fits all approach. “Smaller, non-publicly listed firms (and their auditors) argue that accounting standards are formulated mainly for larger, publicly traded firms” and that “compliance costs are disproportionately higher and the
Answer: The revenue coming from the promise to integrate internet technologies on Windows 95 and office would be recognized in the future by the revenue recognition policy. However, the development costs to provide these enhancements are already incurred in the and expensed in the company’s treatment for the software development costs. The combined effect of these two policies is the mismatch of expense with revenue.
potential lost sales each year indefinitely, so an initial sales is not the end of a revenue management process.
As the business environment grows and companies find new ways to expand into their respective - or even new – markets, it is important that reporting standards stay up to date with changes and continue to assist companies in providing their users with useful accounting information. Information is labelled as being useful when it meets the
Based on these guidelines, revenue should not be recognized until it is realized or realizable and
According to Kimmel, Kieso and Waygandt (2011), "the revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned." Basically, this means that revenues should be recognized (or in other words recorded) on completion of the process of revenue generation i.e. once revenue has been earned. This is as per the accrual basis of accounting. Essentially, revenue recognition derives its significance from its utilization when it comes to the determination of the specific accounting period in which earnings should be recorded.
Revenue is one of the most important measures used by investors when assessing a company’s performance. CSX and Norfolk Southern both use GAAP when reporting revenue. CSX recognizes revenue by using “Free on Board” shipping, meaning that the the sale is considered complete when the carrier takes possession of the goods. Thus, the buyer is responsible for the transportation costs and liability of the goods. In contrast, Norfolk’s transportation revenue is recognized in proportion to its movement of shipment from the original location to its final destination. In comparing the profitability of the two companies, CSX’s sales tends to be higher due to the fact that revenue is recognized at a single occurrence.
The company sells its products through two separate channels of distribution. Each is treated as a
Apple Inc. designs, manufactures, and markets personal computers, mobile communication devices, and portable digital music and video players and sells a variety of related software, services, peripherals, and networking solutions. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. (Source: Company Form 10-K)
The accounting practices at Carlton normally permit revenue recognition after the shipment of the computer systems. Peale, Gower and Quill, Carlton’s auditors, are worried about the accounting practices regarding revenue recognition of certain transactions during the
Timing of revenue recognition is a crucial part in revenue recognition. According to US GAAP, revenue should be recognized when it is realized/realizable and earned (FASB, 1984, Para. 83).
Pepsi revenue recognition policy was compared to their competitor Coke to determine if Pepsi uses an accounting method that would inflate their earnings. Pepsi states, “we recognize revenue upon shipment or delivery to our customers based on written sales terms that do not allow for a right of return” (p. 73). Pepsi revenue recognition method is similar to Coke. Coke states, “we recognize