Osim's 2006 Financial Report

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1. What is the nature of business undertaken by the company?

OSIM is a Singapore-based international brand marketing business famous for its flagship luxury massage chairs that aims to be the world's leading healthy lifestyle product manufacturers. It has a wide product line that is diversified across four business themes: Health, Hygiene, Nutrition and Fitness. Its activities involve marketing, franchising and selling. OSIM is a public listed company listed in the Singaporean Stock Exchange.

What are the company's main types of revenues and expenses?
OSIM's main type of revenue is from its sale of goods which contributes a massive 98% of its total revenue (Consolidated Profit and Loss statement, page 92, note 23 on pg. 120). Other sources of revenue include other operating income and changes in inventories of finished goods which contributes about 2% of OSIM's revenue.

Their main types of expenses are from the purchase of finished goods which was almost 50% of their total expense. (Consolidated Profit and Loss statement, page 92). OSIM's other operating expense also contribute near to 40% of OSIM's total expense.

SourceRevenue (2004)Percentage of Revenue
Turnover
Less eliminationRetail$263,050,00097.81 %
Distribution$194,951,000
Other operating income$5,138,0001.51%
Changes in Inventories of finished goods$2,290,0000.68 %

Table 1. Distribution of OSIM's revenue

Source (add in %)Expenses (2004)Percentage of Expenses
Finished goods purchased$142,361,00046.3%
Personnel Expenses$ 43,102,00014%
Depreciation & amortization of goodwill arising on consolidation$9,724,0003.2% Other operating expenses$112,404,00036.5%

Table 2. Distribution of OSIM's expense
2. What is meant by the term "revenue recognition"?

Revenue Recognition is a concept that revenues are recognized in the time frame they are earned. In other words, a company should not recognize revenue until realized or realizable and earned by the company. Revenue must be realized when the service is finished or the transaction is completed. For instance, a magazine company was to receive $1500 from customer for one year of subscription; they should not include the total amount as revenue in the income statement.

When does a company recognize revenue?

Revenue is generally considered realized when cash is received for the sale of a product or performance of a service net of goods and services tax and discounts. Revenue This happens when a promise to pay is received in exchange for the sale of a product or performance of a service. The promise to pay could be verbal (account receivable) or written (note receivable). Revenue is generally earned when a legally enforceable exchange takes place (e.g., consideration has been tendered and the buyer takes possession of the product or benefits from the performance of a service).

For different kind of revenue, OSIM recognize it differently;(Note 2, page 103)

For sales revenues, they are recognized net of goods and services tax and discounts when goods have been delivered and accepted by the customer. For franchise fees, they are recognised upon the performance of services as stipulated in the franchise agreements. For rental and interest income, they are recognised on a time-apportioned basis. For dividend income,they are recognised when the shareholder's right to receive the payment is established. For Group turnover, they excludes intercompany transactions and turnover of associated companies.

Explain concisely if the method(s) adopted is/are appropriate

In the case of OSIM, as it is a trading business, it recognizes revenue earned when it records sales on purchase, either through direct sales or on sales-on-account. Their method are quite conservative and conservatism is a good thing in the accounting industry as it prevents over estimating figures.

In respect, the method adpoted by OSIM is appropriate as it fulfills the financial accounting standards set...
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