27 March 2008
FOB and the accountants
Oh, and somebody should put on some music too.
Anyway, here's a simple one. If a company accepts prepayment for some service, can it immediately book the cash as "revenue"?
Answer: no. From the point of view of financial accounting, the cash is just cash. It becomes "revenue" only when and as it's earned.
Suppose company X gets its money in September for work it will do in October then? When does it receive the revenue for the purpose of its books? Answer: in the fourth quarter, not in the third.
Suppose the work consists of delivering a product to a customer? Suppose that the customer is far away, and the product can be delivered there only by a truck that will take more than a day to get from company X's warehouse to the customer? And suppose this delivery takes place right on the cusp of a new quarter?
Then we might have to interpret contracts between company X and its trucker to know our answer. If our company loaded the goods onto the truck on September 30, and they received their destination on October 2: third quarter or fourth?
What do the initials "FOB" stand for anyway, and what does that have to do with the above?
Some few cognoscenti will recognize the real-life story I've just stylized. But for most of you, this just sounds like a rather random train of thought. And there I will leave it. My mind just keeps on trucking, whatever fiscal quarter we're in, and whether it ever makes a point, or a delivery, is best left to the judgment of the medical profession.
Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.