Under the gross method, which the company used to report revenue on the income statement shown in its original S-1 filing, revenue was reported as the gross amount Groupon billed its customers for the sales of coupons to various retailers or service providers. Groupon subsequently recorded the percentage of revenue that its partners receive in the transactions as a cost of sales. This was the reason for the inflated cost of sales figures in the income statement that was created using the gross method. Under the net method Groupon only recorded the difference between the amount that it billed customers for the sale of Groupons and the percentage of revenue it payed its partners as …show more content…
Which of the two amounts do you think Groupon preferred? Why did they prefer it? Using the data provided in Tables 1 and 2, compute the gross margin percentage and asset turnover ratio (sales divided by year-end total assets) for 2009 and 2010 under the gross and net methods and explain if either of them might have affected Groupon’s choice of revenue recognition method. Although the revenue figures that Groupon reported under the net method provide a more accurate representation of the company’s actual business performance, the gross revenue recognition method undoubtedly makes the company’s financial performance appear much stronger. Considering the attention surrounding Groupon’s rapid growth and the company’s highly anticipated IPO, it is no surprise that management chose to report revenue under the gross method in its first S-1 filing. This decision obviously made the company’s standalone revenue figures appear much greater; however, these numbers also impacted year-over-year revenue growth. Under the gross method, revenue appears to increase 2,247% from 2009 to 2010. Using the revenue figures in the amended income statement shows a slightly lower revenue growth rate of 2,058% for the same two years. Although the difference between these two figures is relatively minor due to the fact that Groupon was experiencing exponential growth at this time, there is reason for concern that revenue growth for Groupon could have been severely misinterpreted in the future. When