ACCOUNTING IN ECOMMERCE COMPANIES
E-commerce companies
characteristics and unique
accounting methods
BA 572 - J. Galván
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Overview
Financial characteristics of E-Commerce
companies
 Accounting consequences
 Unique accounting aspects

BA 572 - J. Galván
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Financial Characteristics of pure
e-Commerce Companies
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Large expenditures on site
development
Large expenditures on customer
acquisition or traffic acquisition
Low levels of revenues
Fast growth in revenues
High levels of losses
Initial stages of the business growth
BA 572 - J. Galván
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Comparison with traditional
Companies

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Lower levels of fixed assets
Higher levels of intangible assets:
 Customers
 Systems
 Content
 Employees
Low marginal costs of a marginal customer
Higher operating uncertainty
Rapidly changing environment
BA 572 - J. Galván
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Financial Characteristics

Large cumulative losses

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Negative operating cash flows

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Start-up costs
Using liquid resources to finance
operations
Negative free cash flows

Operating cash flows are not sufficient to
cover capital expenditures
BA 572 - J. Galván
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Financial Characteristics

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High growth rates in revenues
 Working capital should grow at a high rate to keep
pace with revenue growth
Large fluctuations in operating results due to
environmental changes
At the initial stages, firms do not have good
managerial controls:
 Unnecessary expenses
 Investments in projects that do not bear fruit and
need to be abandoned
BA 572 - J. Galván
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Financial Characteristics

Financing opportunities:
Can typically not borrow funds
 Can issue equity, but dilutes the founders
and prior investors
 Can finance some operations through
issuance of contingent claims

Stock options to employees
 Warrants to suppliers (rent, referring sites,
etc.)
 Convertible preferred stock and convertible
BA 572 - J. Galván
bonds

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Financial Characteristics

Large differences between firms that issued stock to
the public and those that did not:
 Cash reserves
 Book value of equity
 Can use cash in agreements instead of using
equity or contingent equity
 Can use cash to acquire new customers
 Can use the cash to build physical operations
BA 572 - J. Galván
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Accounting Consequences
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Intangible assets cannot be recorded in many cases,
and are immediately expensed.
Intangible assets that are recorded have shorter
useful lives than tangible assets
 Depreciation of equipment versus amortization of
software development costs
Some contingent claims will not be recorded as an
expense.
BA 572 - J. Galván
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Unique Accounting Aspects

Disclosure of various revenue sources
Sale of products or services
 Advertising
 Leveraging customers


Disclosure of various expenses
Product or service cost
 Selling and marketing cost
 System development cost
 Content cost

BA 572 - J. Galván
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Unique Accounting Aspects

Barter revenues
Can account for a significant proportion of
all revenues
 What is the economic cost of bartered
advertising?
 Can you rely on non-bartered revenues to
determine revenues and costs of bartered
advertising?

BA 572 - J. Galván
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Unique Accounting Aspects

Stock options awarded to:

Employees

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Suppliers and service providers


Usually not recorded as an expense
Shown as an expense, but not necessarily
matched properly with revenues
Customers

Should be shown as a selling expense, but
sometimes shown separately
BA 572 - J. Galván
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Other Unique Accounting Aspects
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Gross or net revenues
 Record commission revenues or total revenues
 Tickets for a performance. Price is $50, processing fee of
$5, customer pays $55.
 Should you show revenue of $55 and cost of goods sold
$50? Or revenues of $5?
 Why does it matter?
Rebates for complementary service
 36 months Internet connection
 Can you show it as revenue and selling expense?
BA 572 - J. Galván
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Other Unique Accounting Aspects

Shipping and handling expenses
included in revenues (and selling
expenses).

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Customer pays $10 for a book, plus $4 for
shipping. Assume the book costs $8 and
shipping is $5. How do you show it on the
income statement?
Free or introductory offer is recorded as
revenue and selling expense.
BA 572 - J. Galván
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Other Unique Accounting Aspects
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How is self-developed software accounted
for? Over what period is it amortized?
When can an auction site recognize
revenues?
 Sometimes needs to list an item for a
specified period.
How should rewards be accounted for?
 Current expenses or capitalized acquisition
costs?
BA 572 - J. Galván
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GOOGLE’S FINANCE
1.
Financials
(In millions of USD)
Income Statement
Quarterly
(Sep '06)
Annual
(2005)
Annual
(2004)
Total Revenue
2,689.67
6,138.56
3,189.22
Gross Profit
1,643.09
3,567.05
1,731.57
Operating Income
931.33
2,017.28
640.19
Net Income
733.36
1,465.40
399.12
11,858.24
9,001.07
2,693.47
15,693.23
10,271.81
3,313.35
Total Current Liabilities
1,216.05
745.38
340.37
Total Liabilities
1,296.14
852.86
384.30
14,397.09
9,418.96
2,929.06
733.36
1,465.40
399.12
Cash from Operating
1,004.32
2,459.42
977.04
Cash from Investing
-2,114.36
-3,358.19
-1,901.36
129.42
4,370.83
1,194.62
-977.58
3,450.30
277.88
Balance Sheet
Total Current Assets
Total Assets
Total Equity
Cash Flow
Net Income/Starting Line
Cash from Financing
Net Change in Cash
BA 572 - J. Galván
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XMAS & ACCOUNTING
BA 572 - J. Galván
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