Revenue should be recorded on the basis of the net proceeds received from customers. Intermediaries who sell the products and services of other firms should count only the fees they charge for their own services. Consider a real estate agent. When she sells your house, she should record only her commission as revenue, not the full value of the house.
Sometimes companies report revenues on a gross basis in order to appear larger. In Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Howard Schilit discussed Papa John’s pizza, which reported $171.8 million of revenue during the first nine months of 1995, of which $78.7 million represented equipment sales to franchisees. Such sales are of weak quality, as once the franchisee has an oven it is unlikely to need another. Given the magnitude of such sales as a percentage of the total, investors in Papa John’s should have been anticipating a sudden slowdown in sales growth as the number of franchises approached saturation.Like this article? Why not try out: