https://www.sec.gov/Archives/edgar/data/1065280/000106528018000069/q4
nflx201710k.htm#sD44414889B8958159AEFBD952798B12B
This is the link to the 10-K Form for Netflix, Inc. a The company identifies
several risks. a The identified risks include the inability to attract or retain
customers, piracy of media, fixed costs of operations, economic and political
risks of operating in other countries, and more.
There are also the risks of overstating revenue or receivables, and the risks of
understating payables and liabilities. a When a company sells services on credit,
it will record those sales as revenue (debit Accounts Receivable, credit Sales
Revenue) in the expectation that it will eventually receive the cash owed. a
When the cash owed is received, the company can record the cash transaction
(debit Cash, credit Accounts Receivable). a If the customers default on the
money they owe, the company will not receive the cash they were counting on.
One way to mitigate this risk is to have a contra account to A/R called
Allowance for Doubtful Accounts. a This provides some protection against
overly optimistic expectations of revenue collection.
Another risk is that of understating payables or liabilities. a When a company
buys products or services on credit, it will record those acquisitions as
liabilities (debit Equipment, credit Accounts Payable) in the expectation they
will eventually pay what they owe. a When the money owed is paid, the
company can record the cash transaction (debit Accounts Payable, credit
Cash). a If the company erroneously understated the amount of money they
owe, the cost of payment will be more than initially recorded. a One way to
mitigate this risk is to have a contra account to A/P called Allowance for
Understated Accounts. a This provides some protection against overly
optimistic expectations of debts owed by the company.
