No Take-Backs

Prepared by: Rola Hamad

Supervised by: eMad Abu Shabaan

Main Idea : rev. recognition

'REVENUE RECOGNITION' :'REVENUE RECOGNITION' :

An accounting principle under (GAAP) An accounting principle under (GAAP) that determines the specific conditions that determines the specific conditions under which income becomes realized under which income becomes realized as revenue. Generally, revenue is as revenue. Generally, revenue is recognized only when a specific critical recognized only when a specific critical event has occurred and the amount of event has occurred and the amount of revenue is measurable. revenue is measurable.

  

Revenue is recognized on two methods:

Accrual Basis The revenue has been achieved Accrual Basis The revenue has been achieved when the when the ownershipownership of the item or the origin of of the item or the origin of the entity the entity move to move to the buyer or the buyer or when the when the service deliveryservice delivery, both got their monetary value , both got their monetary value or notor not

Cash Basis Revenue is recognized under this Cash Basis Revenue is recognized under this basis, upon basis, upon receipt of cash receipt of cash regardless of the regardless of the date of the sale or delivery or service . It uses date of the sale or delivery or service . It uses this basis, sales by installmentsthis basis, sales by installments

No Take-Back

This rule which holds that This rule which holds that revenue should not be booked revenue should not be booked on inventory that is shipped if on inventory that is shipped if the customer can return it at the customer can return it at some point in the futuresome point in the future

Stuffing channel

Give a big discount on a huge load for Give a big discount on a huge load for someone who is not in needsomeone who is not in need

Once the merchandise is shipped, they Once the merchandise is shipped, they record it as a sale in their books, record it as a sale in their books, regardless of whether the products are regardless of whether the products are paid for or not. This makes sales appear paid for or not. This makes sales appear much higher and to higher earnings.much higher and to higher earnings.

Supporting Idea : recognize rev. on

lucent

Lucent Technologies : Lucent Technologies : was an was an American telecommunications American telecommunications equipment company equipment company headquartered in Murray Hill, New headquartered in Murray Hill, New Jersey, in the United States . Jersey, in the United States .

Cont...

• it was able to report continued sales it was able to report continued sales growth.growth.

• It’s investor got a nasty surprise It’s investor got a nasty surprise when distributor returned those when distributor returned those goods . goods .

• Lucent has announced one financial Lucent has announced one financial disappointment after another this year.disappointment after another this year.

• The company's stock market value has The company's stock market value has plunged to about $47 billion from $231 plunged to about $47 billion from $231 billion a year ago. billion a year ago.

• Investors bid shares down $1.31, or 8.5%, Investors bid shares down $1.31, or 8.5%, to a 52-week low of $14.19 as of 4 p.m. to a 52-week low of $14.19 as of 4 p.m. Thursday in New York Stock Exchange Thursday in New York Stock Exchange composite trading composite trading

Supporting Idea : recognize rev. on OthersSunbeam Corporation is an Australian home Sunbeam Corporation is an Australian home appliance brand with headquarters in Sydney, New appliance brand with headquarters in Sydney, New South Wales, The company began in Australia as a South Wales, The company began in Australia as a small branch of the American groupsmall branch of the American group

Company practice stuffing the channel on the Company practice stuffing the channel on the barbeque grills and other products, and therefore it barbeque grills and other products, and therefore it is faced with a problem and was forced to restate is faced with a problem and was forced to restate its earnings.its earnings.

Investors can be tipped off to potential Investors can be tipped off to potential channel stuffing by carefully reviewing a channel stuffing by carefully reviewing a company’s revenue recognitioncompany’s revenue recognition

Through a policy:Through a policy:

by watching inventory and receivables by watching inventory and receivables levels.levels.

use of cash incentives to encourage use of cash incentives to encourage distributors to buy products (as was done distributors to buy products (as was done at Monsanto)at Monsanto)

Cont...

Monsanto CompanyMonsanto Company is the largest  is the largest seeds of company in the world in terms seeds of company in the world in terms of high revenue and large profits and of high revenue and large profits and give great incentives to distributors, but give great incentives to distributors, but this has been investigated in incentives this has been investigated in incentives paid to distributors, the company has paid to distributors, the company has been calling for documents by the SECbeen calling for documents by the SEC

When sales increase along with When sales increase along with receivables:receivables:

that customers are not paying for goods that customers are not paying for goods shipped on credit.shipped on credit.

In the case of increasing the level of In the case of increasing the level of inventory:inventory:

are an indicator that customers have all are an indicator that customers have all the goods they need, This higher likelihood the goods they need, This higher likelihood of goods being returned and revenues and of goods being returned and revenues and income being restated.income being restated.

Conclusion

Companies that rule applies, so that the Companies that rule applies, so that the revenues are not recorded unless the revenues are not recorded unless the goods have been shipped, and be non-goods have been shipped, and be non-refundable, so as not to get into the refundable, so as not to get into the restated earning .restated earning .

So remember , no take-backs!So remember , no take-backs!

Subtitle :

The effects of the company's The effects of the company's policies in recording revenue policies in recording revenue resulting from the returnresulting from the return

Reflection

"No take back" the rule correct, if "No take back" the rule correct, if the company's return became the company's return became happens tension, and forced the happens tension, and forced the company to restate its earnings, company to restate its earnings, and this takes time and costs.and this takes time and costs.

Thank you