week 4 (module 5) - revenue analysis Flashcards
what are the ocmponents to analysis of revenue?
- growth
- internal/external - quality
- recurring/non recurring
- customer concen/
- seasonality/volatility
- gross/net revenue - revenue recognition policy and changes
- Consistency in revenue recognition
- New Accounting Standards ( IFRS 15 or ASC 606)
what s growth analysis in terms of internal growth?
- growth achieved through the company’s existing operations
Key Drivers:
Increased Sales Volume
Price increases
New product development
New market with existing products
Features:
Low risk, sustainable, builds on existing strengths
§ Relatively slow
§ Example:
§ Tesla introduced Model 3 in 2016 and CyberTruck in 2019
what s growth analysis in terms of external growth?
Growth achieved through mergers, acquisitions, partnership or other external means
Key Drivers:
§ M&A
§ Same industry:
§ Vertical M&A: supplier, distributor
§ Horizontal M&A: competitors
§ Cross-industry- Diversification
Considerations:
§ Quick, immediate revenue increase
§ High risk due to integration challenges, significant capital investment may increase leverage or dilute equity
Example:
§ Facebook acquires Instagram in 2012 and WhatsApp in 2014
§ Microsoft acquired Activision Blizzard in 2023
what is recurring revenue and non recurring revenue?
recurring:
Predictable, long term
* Link to Core Business
Non-recurring:
* One time or irregular
* Example:
* One time sales
* Asset Sales
* Discontinued
* Need to analyze them one by one to determine their impact on earnings
how does the comp report divest of business segments?
bottom of i/s, continuting vs “discontinued operations”, segregate discont assets and liabilities on current/prior b/s
what 2 components does the discont operations line have
net income (loss) from segment’s business actvities prior to divesture
any gain/loss on sale of business
why segregate discont operations
- they rep a transitory item
- transitory items don’t recur, therefore largely irrelevant to predicting future performance
what criteria must be fulfilled for the disposal of a business unit to be classified as a discont operation
- rep a strategic shift for comp
- have major effect on comp’s fin results
what is customer concentration?
the extent to which a company’s revenue
is dependent on a small number of customers
why does customer concen. matter
- High customer concentration can lead to revenue volatility if key customers reduce orders or leave.
- crucial for assessing business risk. It highlights the potential vulnerability a company might face if it loses one or more major customers.
what is the difference between seasonalityvs volatility
seasonality:
predictable fluctuations with a year, repeat consistently each year
* Interpret quarterly report carefully
* Retail, Tourism, ski resorts
volatility:
* Unpredictable revenue variation over time
* High volatility indicates underlying risks
* Could be one time event
* Oil and Gas
what is the diff between gross and net revenue: allowance
- what are varities of sales allowances?
- rights of return, sales discounts for volume purchases, retailer promotions (point of sale price markdowns and other promotions)
- reduce amnt of cash comp receives
- gaap comps must report amnt of cash expected to be received (net sales)
- compsmust deduct from gross sales expexted sales returns and pther allowance
what do comps provide of their sales alowances?
reocnciliation:
- sales returns
- slaes discounts and incentives
what are 3 metrics used to analyze sales allowances?
- additions charged to gross sales
- Measures the income statement amount
- Reveals effects of the pricing pressure on net sales
- Expect the percentage of sales allowances to gross sales to increase (thus reducing net sales) as pricing pressure increases - Allowance as Percentage of Gross Sales
- Measures the balance sheet amount - Adequacy of the allowance amount
- Compares the dollar amount of the estimates for future sales returns to the amount actually realized professionals
how to adjust sales allowance estimates?
- require estimates; managers pad/shave estimates
- estimate average rate of additions charged to gross sales
- apply av rate to determe adjusted amnts for related balance sheet and i/s accounts
av rate = add charges/gross sales
balance sheet is cumulative and each year’s balance sheet adjustment = that year’s adjustment + sum of all prior year’s adjustments
what are the 5 steps to revenue recognition
- identify contracts
- identify performance obligations
- contractual - determine transaction price
- estimate revenue using expected selling price - allocate transaction price
- recognize rev as when each performance obligation is satisfied
- customer obtains control
whta is is unearned revenue
- recorded liability bc comp is obligated to deliver pre paid product/service
- revenue is recognized when good is provided, service is completed
what companies is deferred rev common amongst?
- receive advance payments from customers
- sell gift cards
- memberships/subscriptions
what does a decrease or increase in deferred revenue mean?
decrease: current reported rev was collect from customers in prior period
increase: predict future increases in revenue and profit
what is aging analysis of receivables?
- estimate uncollectible amounts
- aging analysis grps a/r by number of days past due
how to account for a/r
- if comp sells goods on account for 100k and establishes an allowance for uncollectible accounts of 2900,
a/r gross = 100k
less: allowance for uncollectible accounts= 2900
a/r net = 97100
how to write off uncollectibel account
- if customer who owes comp 500 files for bankruptcy, comp records write off and adjusts allowance
a/r gross = 99500 (100k - 500)
allowance for uncoll = (2400) (2900 - 500)
a/r net = 97100
how is the magniture of a/r measured?
a/r turnover = sales / av a/r
dso = 365 / a/r turnover
DSO reveals the number of days, on average, that accounts receivable are outstanding before they are paid. The DSO can be:
- Compared with the company’s established credit terms to investigate if the company’s customers are conforming to those credit terms.
- Computed over several years for the same company to investigate trends
- Compared with peer companies
if a/r has grown more quickly than sales then:
- lower a/r turnover
- high % of a/r to sales
- lengthening of dso
why is the trend of a/r growing quicker than sales unfavourable?
- comp is more lenient in granting credit to its customers
- credit quality is getting bad
- mix of prod sold changes with prods or cutsomer contracts having longer payment terms
collecting a/r quicker increases
operating cash flow
what are two potential interpretations for decrease in allowance?
- credit quality has improved
- comp is underestimating allowance amnt
how to adjust afda amnt?
- estimate average rate of allowance to a/r gross
- apply average rate to determine adjusted amnts for related balance sheet and income statement accounts
