Reference no: EM131411247

Many Internet firms "gross up" their revenues by reporting the entire sales price a customer pays at their site, when in fact the company keeps only a small percentage of that amount. Take Priceline.com, for example, the company made famous by those William Shatner ads about "naming your own price" for airline tickets and hotel rooms. In SEC filings for the year ended 2006, Priceline reported that it earned over $1.1 billion in revenues, but that included the full amount customers paid for tickets, hotel rooms, and rental cars. Traditional travel agencies call that amount "gross bookings," not revenues. And much like traditional travel agencies, Priceline keeps only a small portion of the "gross bookings," namely, the difference between the customers' accepted bids and the price it pays for the merchandise or service. The rest, which Priceline calls "cost of revenues," are paid to the airlines and hotels that supply the tickets and rooms. In 2006, those costs came to $722 million, leaving Priceline just $401 million. After subtracting other costs-like advertising and salaries-Priceline netted a profit of $74 million.

REQUIRED:

a. Comment on Priceline's method of booking "revenue."

b. Like Priceline, many Internet companies reported losses in the early years, forcing analysts to focus on other reported numbers. For example, at one time Priceline's stock price per share was 23 times its revenue per share, and 214 times its gross profit (revenue product costs) per share. Can you think of a reason why Priceline might want to include "gross bookings" as revenue?

c. Why do you think that the SEC is clamping down on unethical accounting practices of Internet companies-most importantly, including as revenue "gross" versus "net" bookings?