week 4 (module 5) - revenue analysis Flashcards

1
Q

what are the ocmponents to analysis of revenue?

A
  1. growth
    - internal/external
  2. quality
    - recurring/non recurring
    - customer concen/
    - seasonality/volatility
    - gross/net revenue
  3. revenue recognition policy and changes
    - Consistency in revenue recognition
    - New Accounting Standards ( IFRS 15 or ASC 606)
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2
Q

what s growth analysis in terms of internal growth?

A
  • 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

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3
Q

what s growth analysis in terms of external growth?

A

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

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4
Q

what is recurring revenue and non recurring revenue?

A

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

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5
Q

how does the comp report divest of business segments?

A

bottom of i/s, continuting vs “discontinued operations”, segregate discont assets and liabilities on current/prior b/s

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6
Q

what 2 components does the discont operations line have

A

net income (loss) from segment’s business actvities prior to divesture

any gain/loss on sale of business

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7
Q

why segregate discont operations

A
  • they rep a transitory item
  • transitory items don’t recur, therefore largely irrelevant to predicting future performance
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8
Q

what criteria must be fulfilled for the disposal of a business unit to be classified as a discont operation

A
  • rep a strategic shift for comp
  • have major effect on comp’s fin results
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9
Q

what is customer concentration?

A

the extent to which a company’s revenue
is dependent on a small number of customers

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10
Q

why does customer concen. matter

A
  • 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.
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11
Q

what is the difference between seasonalityvs volatility

A

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

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11
Q

what is the diff between gross and net revenue: allowance

A
  • 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
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12
Q

what do comps provide of their sales alowances?

A

reocnciliation:
- sales returns
- slaes discounts and incentives

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13
Q

what are 3 metrics used to analyze sales allowances?

A
  1. 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
  2. Allowance as Percentage of Gross Sales
    - Measures the balance sheet amount
  3. Adequacy of the allowance amount
    - Compares the dollar amount of the estimates for future sales returns to the amount actually realized professionals
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14
Q

how to adjust sales allowance estimates?

A
  • 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

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15
Q

what are the 5 steps to revenue recognition

A
  1. identify contracts
  2. identify performance obligations
    - contractual
  3. determine transaction price
    - estimate revenue using expected selling price
  4. allocate transaction price
  5. recognize rev as when each performance obligation is satisfied
    - customer obtains control
16
Q

whta is is unearned revenue

A
  • recorded liability bc comp is obligated to deliver pre paid product/service
  • revenue is recognized when good is provided, service is completed
17
Q

what companies is deferred rev common amongst?

A
  • receive advance payments from customers
  • sell gift cards
  • memberships/subscriptions
18
Q

what does a decrease or increase in deferred revenue mean?

A

decrease: current reported rev was collect from customers in prior period
increase: predict future increases in revenue and profit

19
Q

what is aging analysis of receivables?

A
  • estimate uncollectible amounts
  • aging analysis grps a/r by number of days past due
20
Q

how to account for a/r

A
  • 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

21
Q

how to write off uncollectibel account

A
  • 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

21
Q

how is the magniture of a/r measured?

A

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

22
Q

if a/r has grown more quickly than sales then:

A
  • lower a/r turnover
  • high % of a/r to sales
  • lengthening of dso
23
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
24
collecting a/r quicker increases
operating cash flow
25
what are two potential interpretations for decrease in allowance?
1. credit quality has improved 2. comp is underestimating allowance amnt
26
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