Tradecity.com Tradecity.com is an internet-based retailer (e-tailer) with a high volume, low margin business strategy. Among its means of generating revenues is to sell ads to other e-tailers. It advertises also, both through traditional media, as well as key internet sites. In recent months, Tradecity.com has been in a tight liquidity situation, as have many others in the industry. Consequently, it has entered into several agreements to swap ads and other products with its customers.
How should Tradecity.com recognize revenues on these swaps? • Not at all. • It depends. On what?
Requirement 1A bill and hold strategy accelerates the recognition of revenue. In this case, sales that would normally have occurred in 1998 were recorded in 1997. Assuming a positive gross profit on these sales, earnings in 1997 is inflated.
Requirement 2A customer would probably not be expected to pay for goods purchased using this bill and hold strategy until the goods actually were received. Therefore, Receivables would increase.
Requirement 3Sales that would normally have been recorded in 1998 were recorded in 1997. This bill and hold strategy shifted sales revenue and, therefore, earnings from 1998 to 1997.
Requirement 4Earnings quality refers to the ability of reported earnings (income) to predict a company’s future earnings. Sunbeam’s earnings management strategy produced a 1997 earnings figure that was not indicative of the company’s future profit-generating ability.