Reference no: EM13491565

Comparing Two Companies in the Same Industry: Kellogg's and General Mills

Refer to the financial information for Kellogg's and General Mills reproduced at the end of the book for the information needed to answer the following questions.

Required

1. Locate the note in each company's annual report in which it discusses revenue recognition. How does each company describe the point at which it recognizes revenue from customers? Are there any significant differences in the organizations' revenue recognition policies?
2. What dollar amount does Kellogg's report for accounts receivable on its most recent balance sheet? What percent of the company's total current assets are comprised of accounts receivable? What is the dollar amount of General Mills's receivables on its most recent balance sheet? What percent of total current assets is comprised of receivables? For which company does its receivables constitute a higher percentage of its total current assets?

Reading and Interpreting Sears Holdings Corporation's Notes-Revenue Recognition

The following excerpt is taken from page 59 of the Sears Holdings Corporation (parent company of Kmart and Sears) 2010 annual report: "Revenues from the sale of service contracts and the related direct acquisition costs are deferred and amortized over the lives of the associated contracts, while the associated service costs are expensed as incurred."

Required

1. Assume that you buy a wide-screen television from Sears for $2,500, including a $180 service contract that will cover three years. Why does Sears recognize the revenue associated with the service contract over its life even though cash is received at the time of the sale?
2. How much revenue will Sears recognize from your purchase of the television and the service contract in Years 1, 2, and 3? (Assume a straight-line approach.) What corresponding account can you look for in the financial statements to determine the amount of service contract revenue that will be recognized in the future?