DIGESTING FINANCIAL STATEMENTS: REVENUE
When it comes to reporting revenue, companies should pinpoint the perilous revenues, match reported revenues to the money at hand, and analyze and compare sustainable growth from other revenue sources.
Determine Risky Revenues
Revenue reporting won’t reveal any trace of deceiving investors, granted we only consider cash. It basically accounts revenue before receiving money. Depending on the entities and other underlying factors, revenue recording can be a simple or complicated process. The first thing to do is to find out the extent of accounting risk connected to the entity.
Many companies with complex processes found themselves restating sold products or services for combining various modes. Their sales normally entail long-term service contracts, making it harder to figure out the revenue to be accounted in a given period wherein the service is not fully transpired. They are also involved in franchise deals, subscriptions, pre-sold memberships, or bundling many products and/or services.
An investor has to figure out the business model. Study the revenue recognition policies especially if you discovered any risky factors.
Check Reported Revenues against Cash Collected
Companies reflect cash from operations either in directly or indirectly. They normally use the indirect format. The direct method shows a separate portion for cash received from customers, which is not seen in the indirect method. To compute the money received from consumer, only three items are necessary: net sales, cash advances from clients, and accounts receivable.
We add the decline (or subtract the increment) in accounts receivable as it represents the money received to repay receivable. Cash advances from clients refer to the money received for unrendered services, also categorized as a current liability on the balance sheet.
For instance, if revenues grew much higher than the money received, it may be a good or bad thing. It is important to take note of the allowance for doubtful account. It pertains to a contra-asset account listing the firm’s receivables that is not expected to be collected or paid
Analyze Sustainable Growth from Other Revenue Sources
Evaluating the sources of revenue includes determining and study various sources of growth. This process seeks to assess the sources of temporary growth and separate those from organic growth.
There are two faces of revenue sources: maybe cash (booked revenue not yet collected) and cash. It also pays to assimilate the technical aspects, which investors usually overlook. For example, if the US dollar escalates, that strength will impact global sales.
The next tutorial will concentrate on working capital.
Digesting Financial Statements: Working Capital
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The Concepts of Economics: Scarcity
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