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Principles of Finance: Unit 3, When Are Revenues Revenues? 28 Views
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Description:
Revenue is the money you take in from selling your product or service. But... what about when there are exchanges? Returns? Bounced checks? Counterfeit fivers?
Transcript
- 00:00
principles of finance a la shmoop. when are revenues revenues? okay you own
- 00:07
the simplest lemonade stand in the world. you sell drinks only for cash and for $1 [lemonade stand pictured]
- 00:12
a drink. at the end of each day you add up the number of dollar bills in your
- 00:17
shoe box and you call that revenues. and that would be accurate and a good way of
- 00:21
accounting for your revenues but what if you guaranteed people that if they
Full Transcript
- 00:25
bought the drink and didn't feel happy for at least the next 30 days to get
- 00:31
their money back. can you still recognize that dollar in
- 00:34
your shoe box as revenue? no .ha. you have to wait 30 days .those dollars are a [dollar bills on a table]
- 00:39
buffer against the liability of people returning to you 29 days later noting
- 00:45
that they aren't happy Daffy and wanting their dollar back. right well that noted
- 00:49
after 30 days I young the 31st day after the last sale you can in fact then
- 00:53
recognize that dollar of sales as revenue. sound goofy ?well in fact he
- 00:59
wants great Microsoft Corporation did the above with guarantee on their
- 01:02
operating systems in the mid-1990s. in essence so that they didn't have to
- 01:06
recognize revenues right away and their guarantee was for almost a yea.r
- 01:11
oh why on earth would a company do that on purpose? like who's gonna return an
- 01:15
operating system for a money-back guarantee when there were no other
- 01:18
options and really no other way to run your computer if you didn't have one.
- 01:22
well at the time Microsoft had a monopoly on the operating system [woman folds arms behind a counter as someone pitches the new operating system to her]
- 01:25
business. Microsoft did it to make their company purposely look less profitable
- 01:31
they were worried about government anti-monopoly regulators raining on
- 01:35
their parade, and they wanted to defer taxable income to you know smooth
- 01:40
earnings and pay less taxes, knowing that business wouldn't always be oh so
- 01:44
awesome and that they could probably use those deferred revenues for a rainy day
- 01:48
someday. well eventually it rained so hard on
- 01:51
Microsoft they more or less drowned, and a judge chastised them for being too
- 01:56
conservative in their accounting. rare phenomenon almost first time in history
- 02:00
that's ever happened, but it happened. well the broader point is that revenues
- 02:03
aren't always revenues in the real world and there are lots of ways of capturing
- 02:07
them. all right let's say your lemonade stand took credit cards and you set up a
- 02:12
deal with Visa and MasterCard they took a nickel for each sale of a [credit card swiped]
- 02:15
dollar that you made, yes we're vastly oversimplifying here but just go with us.
- 02:19
when you report revenues do you report a dollar and then have a nickel of cost
- 02:23
always? or do you report ninety five cents as your revenues? well in this case
- 02:27
you report a dollar and just deal with credit card processing costs as an
- 02:31
expense line-item forever. why? because if you didn't it would cloud things. one
- 02:37
could then ask why do some lemonade sell for a dollar and others sell for 95
- 02:43
cents? like some people paid cash some paid credit cards. Ever note that a lot of
- 02:46
restaurants and other small businesses charge you extra if you charge like Visa
- 02:52
or MasterCard versus just paying them in cash? well it's clear accounting to show [payment policy document shown]
- 02:56
your work. at least in this case but here's another rub eBay offers a bunch
- 03:00
of merchandise for sale in its garage sale like environment. it sells a
- 03:05
slightly used six thousand dollar hot tub for fifteen hundred bucks but eBay
- 03:10
doesn't own the hot tub that's getting sold. they're just the listing agent
- 03:14
behind the sale for which they take a commission. call it five percent in this
- 03:18
case that would be seventy five bucks for the tub. and yes again we're vastly
- 03:22
over simplifying here but go with us .so E Bay report fifteen hundred as revenues
- 03:26
or seventy five while in reality it reports both but former is reported as
- 03:30
gross merchandise, not that gross and then they more or less well ignore the
- 03:35
numbers and the rest of their income statement. why would eBay do this ?because
- 03:38
gross merchandise is a very good proxy or indicator of future commissions [Teddy bear put in a box]
- 03:44
likely coming eBay's way. it's also good as a check point for what the commission
- 03:49
rates actually were. like if you're an ebay powerseller you'll know that real
- 03:53
commission prices are all over the map and higher rates would be an indicator
- 03:56
that eBay has more power with the selling community. one other perspective
- 04:00
is worth thinking about here people. after a seventy five dollar sale eBay
- 04:03
has a bunch of costs keeping the website up ,lawyers tracking fig bars for the
- 04:08
snack area and so on. so on that $75 sale eBay might have twenty five dollars in
- 04:13
pre-tax profits. well on seventy five bucks of revenues twenty five dollars in
- 04:17
pre-tax profits is a thirty three percent margin business. pretty high
- 04:21
margin business and it kinda fits in with the margin structure
- 04:25
of other analogous software companies. well how weird would it have been to
- 04:30
have shown $1500 as revenues and then show $25.00 in pre-tax profits. you go [ebay income statement shown]
- 04:36
from a 33% margin business to being uh what is that about 1.7 percent margin
- 04:41
business well whenever you see oddball numbers like this listen to your dark
- 04:47
side. ya know at the time of eBay's IPO there were a lot of commerce companies
- 04:53
out there who had no real earnings or no prayers of ever having them.
- 04:57
how were they valued by savvy Wall Street investors well just as a multiple
- 05:01
of revenues so if you showed hugely high revenues, well then relative to lemonade
- 05:07
stand.com you were cheap according to Wall Street standards in reality eBay
- 05:11
actually had real earnings or profits over time and didn't need the on a
- 05:16
revenue multiple basis worth cheap that sleazy marketing things that a lot of
- 05:21
companies adopted. yeah karma it's alive. all of those companies now are long dead
- 05:27
and buried. [headstone pictured]
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