ShmoopTube

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principles of finance a la shmoop. when are revenues revenues? okay you own

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the simplest lemonade stand in the world. you sell drinks only for cash and for $1 [lemonade stand pictured]

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a drink. at the end of each day you add up the number of dollar bills in your

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shoe box and you call that revenues. and that would be accurate and a good way of

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accounting for your revenues but what if you guaranteed people that if they

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bought the drink and didn't feel happy for at least the next 30 days to get

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their money back. can you still recognize that dollar in

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your shoe box as revenue? no .ha. you have to wait 30 days .those dollars are a [dollar bills on a table]

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buffer against the liability of people returning to you 29 days later noting

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that they aren't happy Daffy and wanting their dollar back. right well that noted

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after 30 days I young the 31st day after the last sale you can in fact then

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recognize that dollar of sales as revenue. sound goofy ?well in fact he

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wants great Microsoft Corporation did the above with guarantee on their

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operating systems in the mid-1990s. in essence so that they didn't have to

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recognize revenues right away and their guarantee was for almost a yea.r

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oh why on earth would a company do that on purpose? like who's gonna return an

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operating system for a money-back guarantee when there were no other

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options and really no other way to run your computer if you didn't have one.

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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]

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business. Microsoft did it to make their company purposely look less profitable

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they were worried about government anti-monopoly regulators raining on

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their parade, and they wanted to defer taxable income to you know smooth

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earnings and pay less taxes, knowing that business wouldn't always be oh so

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awesome and that they could probably use those deferred revenues for a rainy day

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someday. well eventually it rained so hard on

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Microsoft they more or less drowned, and a judge chastised them for being too

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conservative in their accounting. rare phenomenon almost first time in history

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that's ever happened, but it happened. well the broader point is that revenues

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aren't always revenues in the real world and there are lots of ways of capturing

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them. all right let's say your lemonade stand took credit cards and you set up a

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deal with Visa and MasterCard they took a nickel for each sale of a [credit card swiped]

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dollar that you made, yes we're vastly oversimplifying here but just go with us.

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when you report revenues do you report a dollar and then have a nickel of cost

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always? or do you report ninety five cents as your revenues? well in this case

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you report a dollar and just deal with credit card processing costs as an

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expense line-item forever. why? because if you didn't it would cloud things. one

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could then ask why do some lemonade sell for a dollar and others sell for 95

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cents? like some people paid cash some paid credit cards. Ever note that a lot of

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restaurants and other small businesses charge you extra if you charge like Visa

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or MasterCard versus just paying them in cash? well it's clear accounting to show [payment policy document shown]

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your work. at least in this case but here's another rub eBay offers a bunch

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of merchandise for sale in its garage sale like environment. it sells a

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slightly used six thousand dollar hot tub for fifteen hundred bucks but eBay

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doesn't own the hot tub that's getting sold. they're just the listing agent

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behind the sale for which they take a commission. call it five percent in this

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case that would be seventy five bucks for the tub. and yes again we're vastly

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over simplifying here but go with us .so E Bay report fifteen hundred as revenues

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or seventy five while in reality it reports both but former is reported as

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gross merchandise, not that gross and then they more or less well ignore the

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numbers and the rest of their income statement. why would eBay do this ?because

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gross merchandise is a very good proxy or indicator of future commissions [Teddy bear put in a box]

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likely coming eBay's way. it's also good as a check point for what the commission

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rates actually were. like if you're an ebay powerseller you'll know that real

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commission prices are all over the map and higher rates would be an indicator

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that eBay has more power with the selling community. one other perspective

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is worth thinking about here people. after a seventy five dollar sale eBay

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has a bunch of costs keeping the website up ,lawyers tracking fig bars for the

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snack area and so on. so on that $75 sale eBay might have twenty five dollars in

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pre-tax profits. well on seventy five bucks of revenues twenty five dollars in

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pre-tax profits is a thirty three percent margin business. pretty high

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margin business and it kinda fits in with the margin structure

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of other analogous software companies. well how weird would it have been to

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have shown $1500 as revenues and then show $25.00 in pre-tax profits. you go [ebay income statement shown]

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from a 33% margin business to being uh what is that about 1.7 percent margin

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business well whenever you see oddball numbers like this listen to your dark

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side. ya know at the time of eBay's IPO there were a lot of commerce companies

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out there who had no real earnings or no prayers of ever having them.

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how were they valued by savvy Wall Street investors well just as a multiple

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of revenues so if you showed hugely high revenues, well then relative to lemonade

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stand.com you were cheap according to Wall Street standards in reality eBay

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actually had real earnings or profits over time and didn't need the on a

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revenue multiple basis worth cheap that sleazy marketing things that a lot of

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companies adopted. yeah karma it's alive. all of those companies now are long dead

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and buried. [headstone pictured]

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