Question:
The birth of the Internet in the 1990s led to the creation of a new industry of online retailers such as
Amazon , Overstock.com , and PC Mall, Inc . Many of these companies often act as intermediaries
between the manufacturer and the customer without ever taking possession of the merchandise sold.
Revenue recognition for this type of transaction has been controversial.
Assume that Overstock.com sold you a product for $200 that cost $150. The company’s profit on the
transaction clearly is $50. Should Overstock recognize $200 in revenue and $150 in cost of goods sold
(the gross method), or should it recognize only the $50 in gross profit (the net method) as commission
revenue?
Required:
1. Obtain the relevant authoritative literature on reporting revenue at gross versus net using the FASB’s
Codification Research System. You might gain access at the FASB website ( www.fasb.org ), from your
school library, or some other source. Hint: this guidance was originally issued in the Emerging Issues
Task Force document EITF 99-19, and you can use the codification’s “Cross Reference” function to
identify where that
EITF appears in the codification.
2. What factors does the authoritative literature discuss that will influence the choice of reporting method
used by these companies? Cite the reference location and the specific titles pertaining to this reference
location.
3. Using EDGAR ( www.sec.gov ), access Google, Inc. ’s 2010 10-K. Locate the disclosure note that
discusses the company’s revenue recognition policy.
4. Does Google discuss determining whether they should report revenue on a gross versus net basis with
respect to any of their products or services? What is the reason Google provides for its choices? Do you
agree with Google’s reasoning?
Answer:
The birth of the Internet in the 1990s led to the creation of a new industry of online retailers such as
Amazon , Overstock.com , and PC Mall, Inc . Many of these companies often act as intermediaries
between the manufacturer and the customer without ever taking possession of the merchandise sold.
Revenue recognition for this type of transaction has been controversial.
Assume that Overstock.com sold you a product for $200 that cost $150. The company’s profit on the
transaction clearly is $50. Should Overstock recognize $200 in revenue and $150 in cost of goods sold
(the gross method), or should it recognize only the $50 in gross profit (the net method) as commission
revenue?
Required:
1. Obtain the relevant authoritative literature on reporting revenue at gross versus net using the FASB’s
Codification Research System. You might gain access at the FASB website ( www.fasb.org ), from your
school library, or some other source. Hint: this guidance was originally issued in the Emerging Issues
Task Force document EITF 99-19, and you can use the codification’s “Cross Reference” function to
identify where that
EITF appears in the codification.
2. What factors does the authoritative literature discuss that will influence the choice of reporting method
used by these companies? Cite the reference location and the specific titles pertaining to this reference
location.
3. Using EDGAR ( www.sec.gov ), access Google, Inc. ’s 2010 10-K. Locate the disclosure note that
discusses the company’s revenue recognition policy.
4. Does Google discuss determining whether they should report revenue on a gross versus net basis with
respect to any of their products or services? What is the reason Google provides for its choices? Do you
agree with Google’s reasoning?
Answer:
