Problem Set 2
Question 1. Understanding Walmart’s financial statements
In this homework we will ask you a series of questions related to revenue recognition based on Wal-Mart 2012’s Annual Report (posted on Stellar ~/Materials/Financial statements used / discussed in class). The goal is to become familiar with real financial statements.
1. How much net sales did Walmart generate for the fiscal period ending on January 31, 2012? $443,854M
2. What was the balance of Walmart’s accounting receivables as of January 31, 2012? $5,937M
3. What was the balance of Walmart’s allowance for doubtful accounts (ADA) as of January 31, 2012? $323M
4. Assume that Walmart wrote-off $10 million of its accounting receivables during the fiscal year of 2012. Use the change in allowance for doubtful accounts from 2011 to 2012 to estimate the amount of bad debt expense (BDE) Walmart recorded for 2012. Use the balance sheet equation (BSE) to record this transaction.
ADA begin + BDE – Write-off = ADA end
252M + BDE – 10M = 323
* BDE = 81M
5. At which point in time does Walmart recognize store sales? At the time of sales.
6. At which point in time does Walmart recognize shopping card sales? Explain any differences between your answers to questions (6) and (7).
At redemption. This is because shopping cards are not actual merchandize. Walmart’s obligation isn’t fulfilled until the shopping card is redeemed for actual merchandize.
7. Suppose Walmart sold $10 million in shopping cards that have yet to be redeemed. Use the balance sheet equation (BSE) to record this transaction.
Cash Deferred Revenue
Question 2.Revenue recognition for Groupon
Groupon is a local commerce marketplace that connects merchants to consumers by offering goods and services at a discount. Traditionally, local merchants have tried to reach consumers and generate sales through a variety of methods, including the yellow pages, direct mail, newspaper, radio, television and online advertisements, promotions and the occasional guy dancing on a street corner in a gorilla suit. By bringing the brick and mortar world of local commerce onto the Internet, Groupon is creating a new way for local merchant partners to attract customers and sell goods and services.
Below is an excerpt from Groupon’s 2011 Annual Report (posted on Stellar ~/Materials/Financial statements used / discussed in class)) about its revenue recognition policy.
The Company recognizes revenue from Groupons when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the selling price is fixed or determinable; and collectability is reasonably assured. These criteria are met when the number of customers who purchase the daily deal exceeds the predetermined threshold, where, applicable, the Groupon has been electronically delivered to the purchaser and a listing of Groupons sold has been made available to the merchant. At that time, the Company's obligations to the merchant, for which it is serving as an agent, are substantially complete. The Company's remaining obligations, which are limited to remitting payment to the merchant and continuing to make available on the Company's website the listing of Groupons previously provided to the merchant, are inconsequential or perfunctory. The Company records the net amount it retains from the sale of Groupons after paying an agreed upon percentage of the purchase price to the featured merchant excluding any applicable taxes. Revenue is recorded on a net basis because the Company is acting as an agent of the merchant in the transaction.
Suppose Groupon offers Rock Climbing Packages at $300 dollars...