Final P

CLC Assignment: COMPANY ANALYSIS

Group 3

Professor Stephen Weiss

ACC. 371

January 31, 2021

Introduction

The GAAP provided new guidelines regarding revenue recognition, in order to simplify the financial statements. The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers. This paper will discuss the revenue recognition criteria of various companies and how they comply with rules of FASB codification.

The Analysis

Microsoft Corporation: Microsoft corporation is the largest company that deals with the manufacturing and sale of electronic devices like iPhones, iPads, laptops and other extra devices in the world. It is the leading company in the production of personal computer software. Its financial statements signify a good performance in the investment sector. From the balance sheet, the short-term investments in the financial year 2020 were $136,527, in 2019 the investments were $133,819 and in 2018 the investments totaled to $133,768 this can be estimated to be 2.02%, 0.04% and 0.59% percentage growth of the company from the previous years, (Warren et al,, 2020).

The notes show that the company has invested $150 in the production of more units of the electronic devices supplied. Investing in workforce and in the security exchange in the purchase of share in the stock exchange. An approximate amount of $100 was invested in the purchase of share and reinvestment of dividends in 2019, (Mayes, 2020).

FASB which refers to the financial accounting standards board has laid out new policies that ought to be followed by every company. For instance, Microsoft corporation follows the principle of impracticability in its operations as required by FASB as it believes excessive costs are included in the principle, (Tysiac, 2018, p.105). Additionally, the company follows the exchanges productive assets which states that the accounting of non monetary transactions should be based on fair values of the assets. According to Microsoft corporation when non-monetary transactions lack commercial substance, they are exempted in accordance with FASB standards. Therefore, Microsoft has made investments in the company in both short-term and long-term investments and follows the FASB standards correctly when preparing their financial statements.

Amazon: Amazon is the second most valuable company in the United States trailing Apple. The company is worth over $1.7 trillion and continues to grow. Amazon recognizes revenue when these four criteria are met, evidence of an arrangement or contract exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is assured (sec.gov). From there they determine if they should report the revenue as gross sales and related costs or the net amount as commission sales. When discount offers are accepted by the customer the amounts are deducted from the transaction price. Generally when the company is obligated in a transaction the revenue is recorded as gross sales. These amounts are determined by using a fixed percentage, fixed payment, or combination of both. Product sales represent revenue from sales of products and related shipping costs and return allowances are estimated using past experiences (sec.gov). The most complicated revenue to record are the prime memberships because they offer a wide range of services. Under GAAP regulations, all revenue cannot be recognized until all parts of the contract are shipped. Amazon’s total revenue for 2019 was 280.5 billion up from 2018. Knowing this information, will help the users of the financial statements by helping them understand when the revenue is recognized and how it is calculated. Amazon discloses all relevant information in the financial statements and complies with all rules provided for the FASB codification, so that investors and the public can get a true idea of the financial standings of the company.

Tesla: Tesla is a company that manufactures, sells, designs and develops high-performance fully electric vehicles. They also manufacture, install and sell solar energy generation and energy storage products. The revenue consists of automotive sales with and without resale value guarantee, automotive leasing and the leasing or sale of energy generation and storage. At the time of revenue recognition, they reduce the transaction price and record a sales return reserve against revenue for estimated variable consideration related to future product returns. Customers can exercise a buyback option in which the company can resell the returned vehicle. This creates a deferred revenue and is listed as a liability. The balance sheet shows a deferred revenue for $1,258 on September 30, 2020 and $1,163 for December 2019. Its total sales revenue which includes the automotive sales, leasing and energy generation and storage totaled $8,771 for 2020 and $6,303 for 2019. Listing the deferred revenue allows the consumer to know what the company assumes the likelihood of the buyback options. The company makes these estimates by assessing the market value and historical experience. Tesla has adopted ASC 606 since 2018. The FASB code for 606 is Revenue from Contracts with Customers. The entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services (FASB 606-05-3).

Conclusion

Each of these companies have followed the rules of FASB codification and GAAP regulations regarding recognizing revenue on the financial statements. The new policies put in place regarding revenue recognition help investors and the public better understand the true financial health of these companies, and has been beneficial to everyone involved.

References

Mayes, T. R. (2020). Financial analysis with Microsoft excel. Cengage Learning.

Warren, C. S., Jonick, C., & Schneider, J. (2020). Accounting. Cengage Learning.

Tysiac, K. (2018). 6 key areas of change for accountants and auditors. Journal of Accountancy, 225(3), 57-63.