This memo is intended to advise the Kitchen Aids Chief Finance Officer on the Revenue related to the cordless mixers sales. Since there are many customers of the cordless mixers, there are several information concerning the selling of this product to retailers and consumers. The advice herein emphasizes that the KA’s financial department should fully understand its obligation to establish the source, expenditure, and profits from sales.
Financial and accounting institutions identify the contractual agreement between the company and the customers as one of the most imperative aspects of recognizing revenues to business firms. According to FASB 2020, ASC para 606-10-25-1, the client and the company contracts are used as gauging parameters in recognizing revenue in a firm. Kitchen Aid applies this approach in the sales of 100 cordless mixers sold to Jones Kitchenware. The warranty document majorly offers security for the cordless mixers that may be faulty after delivery to the customer. By signing a one-year warranty upon delivery of the cordless mixers, authentication of the contacts as a sign of contractual agreement is evident.
In the contract signed for a warranty, there are performance obligations within the contract. This further affirms the existence of recognition of revenue to the Cordless Mixers Sales, by Kitchen Aid. The performance obligation is defined as an additional contractual document signed by the client and the company offering the transfer of goods or services (FASB 2020, ASC para 606-10-25-14). In considerations of the KAs case, there are performance obligations such as discounts and non-contractual sales to individuals. Discount considerations can be applied in situations when the KA company involves sales to individuals. Besides, an agreement of complete ownership of the cordless mixer by the JK and other lone customers can be considered as a performance obligation.
Through the determination of the traction prices, KA company has achieved revenue recognition. According to FASB 2020, ASC, this is achieved in KAs situation when the timings of payments are clarified “On January 1, KA sells to and receives payment from JK for 100 cordless mixers with a one-year warranty for $50 each” (para 606-10-32-2). Moreover, the discounts are retroactive, meaning if JK purchases a total of 2,000 mixers during the year, a discount of 10% will be applied to all 2,000 mixers at year-end.
Mathematically, it is cost-effective for JK to buy mixers above 2000 since:
- Supposed he buys 24000 he receives a discount which is calculated as follows,
- 2400 x $50= $120000, with 10% discount, (50×90)/ 100 = 45 per mixer
- Considering buying at a discount 2400x 45=10800
120000-108000= $ 12000 what is saved if JK buys at a discount. With a probability of 25 percent of breakage, the company realizes a profit still.
Another way of identifying revenue recognition is to allocate the process of the already identified performance obligations. This method is ideal since KA uses the price allocation to the standalone customers (FASB, 2020, ASC para. 606-10-32-29). It is necessary to apply the formula to delve into this matter deeply. Ford KA, producing a mixer, is $32, and this is sold with a warranty to the standalone customer at $40. The difference here marks the amount realized as a profit if one unit of the mixture is sold to a customer. Since there are no warranties, the difference creates the revenue realized.
(40-32) $ = $ 8
Therefore, if JK buys 2000 cordless mixer from the KA company,
In one year 12000$ from the JK and 8$ from a standalone buyer will be the KA company’s revenue.
Finally, revenue is recognized when there are transfers to the customers, in such a situation, there is a possibility of receiving a bonus by the supplying company. Based on (FASB 2020, ASC para606-10-25-23) KA, should therefore recognize $ 12000 plus $8 assuming that one standalone customer bought one mixer and the company maintains a supply of over 2000 to JK.
Work Cited
FASB Accounting Standards Codification (ASC). (2020). Web.