Chapter 4: Revenue Recognition

http://www.financialpost.com/story.html?id=2538959

SUMMARY

This article enlightens us on Toyota’s attitude towards their customers. Recently, Toyota’s sales have declined dramatically because of their “sticky pedal” issue on new automobiles. The gas pedal on some cars have been catching or “sticking” onto the floor mat when it is fully pressed down. The number of vehicles with this confirmed issue is extremely small but Toyota is reacting quickly and responsibly to solve the problem. A customer shares his experience with Toyota’s products. He owned a 1990 Toyota 4 runner and the head gasket began to fail at 114,000 kilometers which was way beyond warranty and the repairs were costly. The owner replaced the gasket and wrote a polite letter to Toyota explaining that he bought the truck because of the company’s reputation for quality products. He asked if Toyota could consider paying for a portion of the $1200 repair and a week later he a letter was received with a cheque covering the full cost of the repair.

CONNECTION

In chapter 4, we covered the components of revenue recognition. One of the first concepts the chapter introduced was the cash to cash cycle. When Toyota sold defected vehicles to automobile retailers in North America, it affected the “collection” stage of the cycle. Since the “sticky pedal” issue was discovered after an extent of time, the cash for the automobiles was already received by Toyota. If automobile retailers had discovered the issue earlier before cash was sent to Toyota, they could have asked for a price allowance or cash discount for the defective products. But in this case these two methods would be ineffective because retailers can not sell unsafe vehicles to customers. Instead, Toyota took the initiative and repaired the defective vehicles. The owner of the 1990 Toyota 4 runner on the other hand, had an expired warranty so his repairs could not be covered. Warranty Service, which is also covered in the beginning of the chapter, states that during a certain period of time, the seller is responsible, to some extent, for production replacement or repair. Since the warranty has expired on the 4runner, Toyota would have collected the revenue if there was any extended warranty. But instead they went the extra mile and covered the repair costs.

REFLECTION

It is companies like Toyota that will survive the longest in the competitive automobile industry. Recognizing and repairing small manufacturing defects quickly will ensure the safety of customers around the world. It is important as well that Toyota recognizes their customers individually, and in this case taking that extra step to ensure a customer is satisfied. Actions such as these give Toyota their reputation for commitment to quality and its customers. When customers have confidence in a company, they usually build loyalty towards the company and will be purchasing their products in the future.

Chapter 3: Processing Data Through the Accounting System

http://www.financialpost.com/news-sectors/trading-desk/energy/story.html?id=2458991

SUMMARY

Sunoco, a natural gas company based in Ontario has launched a two million dollar law suit against Suncor Energy Company. A representative from Suncor said they received the statements on Monday and have no comments about this case until they go to court. The company claims that Suncor made an internal announcement last week planning to shut down all three hundred Sunoco retailers in Ontario. Suncor plans to sell one hundred of the retail locations in April and rebrand the rest under the Petro-Canada name. The retail company Sunoco is arguing that Suncor violated the Ontario franchise legislation and prevented them from invalidating an agreement for the compensation.

CONNECTION

In chapter three, we looked more in depth into the accounting system. The chapter covers the whole accounting cycle from analyzing transactions to preparing financial statements. We were introduced to the multi-step income statement format, which ties into the article summarized above. Since Sunoco is filing a two million dollar law suit against Suncor Energy Company for violating their franchise agreements, Suncor will now have to disclose the information in their financial statements. In the multi-step income statement, there is a category called extraordinary items. An extraordinary item is one that is not typical in the company’s business activities and can not be controlled by the company’s owners or managers. If the court approves of the lawsuit filed by Sunoco, Suncor will have to list the two million dollar loss under extraordinary items on their income statement so the users of the financial statements may be informed of this event.

REFLECTION

It is unethical that Suncor Energy Company is conducting internal activities to shut down Sunoco. If Sunoco had an agreement with Suncor, it would be most ethical to consult the company before taking drastic actions. Since last August when Suncor and Petro-Canada officially merged, they are now the largest energy company in Canada. Suncor now has more confidence in taking risky maneuvers because of their domination in the market place. From the actions of Suncor, it is clear that they are seeking an even higher market share for energy because they are planning to rebrand most of the retail locations of Sunoco after they are forced to shut down. If the courts does not approve of the lawsuit, Suncor could have a monopoly over the market for energy in both Ontario and Canada.

Chapter 2: Business Transaction Analysis and Financial Statement Effects

http://money.cnn.com/news/newsfeeds/articles/marketwire/0559726.htm

SUMMARY

Health Benefit Direct, an American based company located in Florida, has released its financial results for the third quarter ended September 30, 2009. This company’s specialty is in the marketing, selling, and administration of a wide range of health insurance products. In the third quarter of this year, the company is continuing the restructuring of their products available for customers. Health Benefit Direct will discontinue selling health and life insurance and instead they will be focusing on offering assistance to customers on shopping, comparing, and applying for health insurance from other carriers. The company has disposed a significant portion of its agency business, which is now classified under discontinued operations in the company’s financial statements. Health Benefit Direct’s subsidiary, InsPro Technologies, is an internet-based marketing and administration system used by insurance carriers to provide professional web-based quotes of more than 100 insurance products.

CONNECTION

In chapter 2 we were introduced to analyzing transactions from everyday business activities and analyzing and interpreting financial statements to obtain the required information for our needs. Looking at Health Benefit Direct’s income statement they have increased their revenues from $1.4 million in the third quarter of 2008 to $1.5 million in the third quarter of 2009. Their operating expenses have increased as well from $3 million in the third quarter of 2008 to $3.7 million in 2009. By looking at the company’s operating expenses we can find out what caused this increase in expenses. The income statement shows that the company has invested a huge sum of money in advertising and marketing and also in their professional fees. They spent $6717 in the third quarter of 2008 compared to $90 814 in 2009 for their advertising and marketing. Their professional fees had an increase of about $200 000 over the past year. My interpretation is that all these increases in operating expenses were caused by the restructuring of the company so they needed to hire more professional staffs and consultants to meet their clients’ needs as well as to advertise their new services.

REFLECTION

The management team of Health Benefit Direct is making a profitable decision by cutting back on expenses that is not essential to their business. As stated by the CFO of the company, Anthony Verdi, "We realized an $800 000 net gain from discontinued operations in the third quarter as we continue to reduce expenses that are not essential to our core technology business.” It looks that Health Benefit Direct is on its way to seeking higher profits from their services. Instead of competing with other insurance companies to sell their products, they are now co-operating with other insurance companies instead. With all the different insurance companies claiming that they have the best insurance products, consumers need a company like Health Benefit Direct to help us make the right decisions. The company emphasizes in quality products as the other companies they work with are some of the most highly rated carriers available.

Chapter 2: Business Transaction Analysis and Financial Statement Effects

http://money.cnn.com/2009/10/13/news/companies/banks.quarter.fortune/index.htm?postversion=2009101311

SUMMARY

In the next few weeks the six biggest banks in the United States will be releasing their financial reports for the third quarter of the year. Analysts expect profit from four out of six banks which include the two best run banks Goldman Sachs and JPMorgan Chase. Wall Street on the other hand expects losses from Wells Fargo, Morgan Stanley and Washington’s biggest beneficiaries Citi Group and Bank of America. According to the bank analysts, and due to the economic turndown, banks are still recovering from their losses which may cause inaccurate profit reports at bigger banks and failure at smaller ones. The stocks of all majour banks reportedly went up in the third quarter which is a good sign of recovery.

CONNECTION

In the past two chapters we were introduced to financial statements and how shareholders are one of the external users of these documents. The main idea behind the article is that the six biggest banks in the United States will be releasing their financial reports for the third quarter of the year. In chapter 2 we further analyzed financial statements and how users can make good use of the information to meet their needs. We were introduced on how to measure profitability from financial statements which is something useful when looking at reports from banks.

REFLECTION

After the financial statements have been released, most investors will probably be unimpressed. The economic recession has brought down the value of bank shares dramatically even though we are seeing great recoveries. Many of the big banks will face problems with repaying their debts from government loans that protected them during the economic crisis. As the deadline for third quarter financial reports are coming near, many of the CEO’s will face the pressure to produce optimistic numbers for analysts and investors alike. Companies such as Morgan Stanley and Wells Fargo are already dealing with management changes and are expected to make more money in the following year.

Chapter 1: Overview of Corporate Financial Reporting

http://www.nationalpost.com/todays-paper/story.html?id=1998093

SUMMARY

Suncor, an oil and natural gas company from Alberta, is planning to sell their natural gas properties to downsize their assets. Since natural gas companies have been facing low prices and unwelcoming capital markets, Suncor is going to be focusing on their oil sand projects instead. The company hopes to complete the sale of their natural gas properties by the end of 2010, keeping their natural gas development projects while cutting off its mainstream exploration assets. Suncor’s vice-president of investor relations, John Rogers, said the company will be undergoing a significant reduction in the number of properties and the amount of production that is coming out of the natural gas division because the company is not happy with the returns from their natural gas assets.

CONNECTION

In chapter one, we are introduced to 3 Business Activities. These were Financing Activities, Investing Activities, and Operating Activities. Suncor’s decision to sell their natural gas properties and assets fell under both the “Investing Activities” and “Operating Activities”. For the first category, Investing Activities, the sale of natural gas properties could be a disinvestment rather than an investment because the company is selling its assets. But this can also be considered as an investment because from a long term perspective the company could further prosper by focusing mainly on their oil projects. As listed in the chapter, typical investing activities include sale of property, plant, and equipment which is what Suncor is currently undergoing. In the second category “Operating Activities”, Suncor’s plan to sell their natural gas properties means that they will not be developing, producing, and marketing their natural gas products.

REFLECTION

Suncor made a good decision to stop investing in their natural gas properties because currently in the market there is a low demand for this resource. It is wise that they are keeping their natural gas development projects running in case the value of this resource increases in the future. This can give smaller companies who are interested in investing in natural gas a good buying opportunity as many other companies such as Cenovus Energy Inc, Petro-Bakken Energy Ltd are selling their natural gas assets as well. It is logical that Suncor is investing more of their money into the oil sands instead of natural gas since natural gas is currently becoming an over abundant resource and the market is more in demand for oil.