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.