1a Identify and explain when the company recognizes revenue
The Consolidated Statement of Earnings on page 39 of the 2011 10K describes the 2 sources of revenue: retail sales and credit cards. Page 33 of the notes state that they recognize revenue from sales at their retail stores at the point of sale, net of an allowance for estimated sales returns. Page 43 describes revenue from sales to customers shipped directly from stores and online and catalog sales includes shipping revenue, when applicable, and is recognized upon estimated receipt by the customer. Credit card revenues include finance charges, late fees and other fees generated by credit cards are recognized as revenue when earned. They recognize finance charges on delinquent accounts until they become 120 days past due, after which we place accounts on non-accrual status. Finally on page 45, sale of gift cards are recognized as revenue when the gift card is redeemed by the customer.
1b. Are there any potential revenue recognition concerns relating to the company’s sales? A potential concern is described on page 33 and is related to customer merchandise return estimates, which are based on historical, return patterns and which reduce sales revenue. Although they have sufficient current and historical knowledge to record reasonable estimates of sales returns, there is a possibility that actual returns could differ from recorded amounts. In the past three years, they have made no material changes to their estimates included in the calculations of sales return reserve. A 10% change in the sales return reserve would have had a $5 million impact on their net earnings for the year. Likewise on page 43, estimates are made on customer merchandise returns for shipped items and can be unpredictable although the revenue has already been recognized. Page 45 describes a potential concern related to gift cards. Gift cards are subject to the concept of revenue recognition in the form of...
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