Revenue Identification Writing Assignment
1) Groupon's Revenue Recognition issues
In September 2011, Groupon considerably changed the way it reported revenue. Prior to this time, Groupon registered revenue behaving as a main, not an agent. Recording income in this manner means that Groupon was recording a " cost of goods sold” entry with each " revenue” entry on every deal it manufactured. These items heavily filled with air the amount of earnings Groupon was reporting. Even though net income was not affected by this kind of, many other items were just like revenue progress rates and gross profit margins (Hilton, 2013). Herein is situated the problem, Groupon is a real estate agent, not a principal. To be deemed a principal, a few requirements must be achieved. These conditions include, " the company is usually primarily in charge of providing the item or service to the customer”, " the corporation owns inventory prior to a buyer ordering this and after a customer returns it”, and " the company provides discretion in setting prices and discovering suppliers” (Spiceland, Sepe, and Nelson 2013). The nature of Groupon's business violates these above mentioned criteria. They do not carry any inventory or perhaps inventory risk on the discount coupons they sell to get discounts. As well, they do not support the primary responsibility for featuring the product or perhaps service they can be selling the discount intended for. Groupon has now gone by using the major method to the internet method for credit reporting revenue.
2) Example of the completely wrong reporting
Because of Groupon's sketchy accounting practices prior to 2012, some "balance sheet" and cash flow statement accounts were improperly reflected in their financial assertions. The most obvious case is within the income assertion. Because Groupon was saving the low revenue of every coupon it sold rather than the net earnings it should possess recorded as it's a real estate agent and not a principal, the sales earnings was way overstated. These people were also recording and which includes on their financial statements a " expense of goods sold” account which should not have been included.
Prior to 2012, a record entry pertaining to selling a $20 voucher would have viewed something like this:
DR Cash 20 dollars
CR Sales Revenue 20 dollars DR Cost of Goods Offered $16
CR Inventory $16
Recording revenue this way was largely overstating simply how much revenue they should have been recording. They really should have been only recording $4 in earnings for a purchase like this. Different accounts that were affected by the incorrect reporting of financial information included the low profit and cost of earnings. On the income statement, Groupon made a couple of changes to what the accounts these are known as when reporting this information. The revenue bank account has been converted to gross billings, and the revenue they statement is now known as net earnings (Merced, Rusli 2011). 3) Investors' Recation
" Groupon has constantly played fast and loose with issues of earnings recognition and what should be considered net earnings, as opposed to major revenue” (Tarsala, 2012). This is the affirmation of Barry Randall, manager of the Crabtree Technology Expense model. Like others on the market, Randall believes that Groupon was overvalued in 2012 because of their poor accounting practices. Groupon had an IPO price in $26 per share in November of 2011. Quickly thereafter came up the news of their revenue identification problems. Since the news pass on, the share price fell dramatically. By simply November 2012, Groupon's share price hit all time lows venturing under $3 per share.
Groupon has had a hard time recovering the importance of their stock in the past couple years. By early Apr of this 12 months, the stock price has only rebounded to a tiny over $7 per talk about. This is partly due to a few ongoing issues in their accounting practices, and their inability to choose a profit. Evidently equity traders are still not wanting to purchase shares...