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.