ACCOUNTING GUIDE

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Critical Thinking Questions

1. What happens to an auction firm's balance sheet when it books listing fees before the deal is complete?
2. How would current liabilities be affected by AOL's former method of spreading marketing costs over 24 months?

Taxation On the Web

What do states want to do about taxing Internet sales? To find out, visit the Internet taxation page of Stateline.org (http://www.stateline.org/internettaxation/). Search for articles written this year about New Jersey, Michigan, and your own state.

1. Where do the governors of New Jersey and Michigan stand on the issue of Internet taxation?
2. What statements, if any, have officials from your state made about Internet taxation?

E-Business Case in Point: Priceline.com

1. How do you think investors would react if an e-business such as Priceline, which reports gross revenues, started reporting net revenues?
2. Should the SEC require e-businesses such as Priceline to report both gross and net revenues? Explain your answer.

E-Business Case in Point: CDNow

CDNow (http://www.cdnow.com) is one of the most popular music e-tailing destinations on the Internet, and its financial results are closely watched by both analysts and investors, especially during peak selling seasons. In 1999, CDNow announced that its Thanksgiving weekend sales were 200% higher than in 1998-a sizable increase due, in part, to the way the firm accounts for coupons redeemed by customers.

Assume that a customer orders $35 worth of CDs by paying $25 in cash and redeeming a $10 CDNow coupon. In such cases, Amazon.com and many other e-tailers would subtract the $10 coupon from their sales revenue and report only $25 in sales. CDNow uses a different procedure: it recognizes the full $35 as sales revenue and then charges the $10 coupon against marketing expenses. Is CDNow's accounting too aggressive? "Coupons are not ad campaigns," says Jack Ciesielski, an accounting expert with R.G. Associates. "They are discounts that should be knocked off the top." Aware of the controversy, the Securities and Exchange Commission has asked the Financial Accounting Standard Board (FASB) to update its guidelines for revenue recognition and other accounting issues related to e-commerce.

1. How would analysts and investors be likely to react if the SEC forced a company such as CDNow to change its procedures and restate revenues by excluding the value of redeemed coupons?
2. Should a business that doesn't subtract coupons from sales revenue be required to mention the total value of redeemed coupons somewhere in its financial statements?

Sources: Edward Iwata, "More Tech Firms Falsify Sales To Boost Stock; Tech Companies Pressured To Keep Earnings High," USA Today, May 5, 2000, http://www.usatoday.com; Matt Krantz, "CDNow Gains in Question: E-Retailer Counts Coupons As Sales," USA Today, December 15, 1999, December 15, 1999, http://www.usatoday.com; Jeremy Kahn, "Presto Chango! Sales Are Huge!" Fortune, March 20, 2000, 90-96.

 

E-Business and Accounting E-Business Case in Point: Iddex When Raymond Ee and Laura Moran planned the start-up of Iddex, their intellectual property management e-business, the co-founders worked out all the details of traditional business activities such as recruiting and marketing. In addition, they spent a great deal of time investigating which country would be the best base for their operations. The list of possible locations included Switzerland, the United States, Hong Kong, and Bermuda. The entrepreneurs were particularly concerned with each country's taxation policies, especially plans to tax Internet sales. They also looked at the privacy regulations, political climate, and telecommunications infrastructure in each area. After comparing each country's restrictions and opportunities, Ee and Moran decided to open Iddex in Switzerland. Given the global nature of e-commerce, more e-businesses are likely to follow a similar process when selecting their locations. What other issues might an e-business start-up want to research before choosing a headquarters country? Should both Switzerland and the United States be able to tax sales that Iddex makes to U.S.-based customers? Source: Jennifer Jones, "Some E-Businesses Lured Overseas: Start-Ups Hope To Take Advantage of Breaks, Benefits Outside the United States," InfoWorld, February 28, 2000, p. 30.   Current events news summaries: America Online was fined $3.5 million for spreading subscriber acquisition costs over 24 months rather than writing them off as current expenses. What did the Securities and Exchange Commission have to say? http://www.ecommercetimes.com/news/articles2000/000516-4.shtml The European Union may levy a value-added tax (VAT) on services purchased via the Internet and delivered to customers within Europe. What would this tax cover? http://cnnfn.com/2000/06/08/europe/eu_vat/ Support for Internet taxation is also building in the United States. What are the current arguments for and against? http://www.ecommercetimes.com/news/articles2000/000717-3.shtml Virtual accounting is only one of the topics e-business CFOs are thinking about. How are companies handling accounting in the Internet age? http://www.ecommercetimes.com/news/articles2000/000726-4.shtml

E-Business and Accounting E-Business Case in Point: Amazon.com Aggressive accounting techniques are again in the e-commerce spotlight. The U.S. Securities & Exchange Commission (SEC) is now investigating how Amazon.com calculates revenues. The e-tailer reports as revenues the stock it receives from e-businesses whose sites are promoted on the Amazon.com siteóa practice that's legal but may be regarded by the SEC as too aggressive. Amazon.com is also reporting fulfillment costs (such as maintaining warehouses) as selling, general, and administrative (SGA) expenses, rather than as items under cost of goods sold. This makes its gross margin appear better. As a result, Amazon.com's gross margin in 2000 is about 24%, although it would be only 14% if fulfillment costs were included under cost of goods sold. Meanwhile, the Financial Accounting Standards Board is going to allow companies to include fulfillment costs either under SGA or somewhere else on the income statement. If these costs are shown elsewhere, however, they must be detailed in a footnote. Amazon.com has already said it doesn't plan to change its accounting practices, and other e-businesses have also indicated that they will continue using the SGA category for fulfillment costs. Unlike the FASB, the SEC would like to see more consistency: "To have two companies account for the same thing differently cannot be the same thing for investors," states an SEC professional accounting fellow. Why would Amazon.com want its gross margins to look better? Why do you think Amazon.com wants to avoid breaking out details of its fulfillment costs? Source: Peter Elstrom, "The End of Fuzzy Math?" Business Week E-Biz, December 11, 2000, EB100, EB 102. Current events news summaries: The goal of the Streamlined Sales Tax Project is to "simplify and modernize sales and use tax administration." How will this effect taxation of online sales? http://www.ecommercetimes.com/news/articles2000/001027-1.shtml A survey of Web shoppers shows that online spending would decrease if such purchases were subject to sales tax. What are the positions of industry groups and government officials? http://www.ecommercetimes.com/news/articles2000/001018-7.shtml Accounting irregularities led Lernout & Hauspie Speech Products, a high-tech company based in Belgium, to file for Chapter 11 bankruptcy protection so it could sort things out. What happened? http://www.thestandard.com/article/display/0,1151,20496,00.html