Recognizing the revenue on when virtual 'credits' are purchased as opposed to used
"I'll assume United States as the country; the answer may (probably does) vary somewhat if this is not correct.  Also, I preface this with the caveat that I am neither a lawyer nor an accountant.  However, this is my understanding: You must recognize the revenue at the time the credits are purchased (when money changes hands), and charge sales tax on the full amount at that time.  This is because the customer has pre-paid and purchased a service (i.e. the ""credits"", which are units of time available in the application).  This is clearly a complete transaction.  The use of the credits is irrelevant.  This is equivalent to a customer purchasing a box of widgets for future delivery; the payment is made and the widgets are available but have simply not been shipped (and therefore used).  This mirrors many online service providers (say, NetFlix) in business model.   This is different from the case in which a customer purchases a ""gift card"" or ""reloadable debit card"".  In this case, sales tax is NOT collected (because this is technically not a purchase).  Revenue is also not booked at this time.  Instead, the revenue is booked when the gift card's balance is used to pay for a good or service, and at that time the tax is collected (usually from the funds on the card).  To do otherwise would greatly complicate the tax basis (suppose the gift card is used in a different state or county, where sales tax is charged differently?  Suppose the gift card is used to purchase a tax-exempt item?)  For justification, see bankruptcy consideration of the two cases.  In the former, the customer has ""ownership"" of an asset (the credits), which cannot be taken from him (although it might be unusable).  In the latter, the holder of the debit card is technically an unsecured creditor of the company - and is last in line if the company's assets are liquidated for repayment.   Consider also the case where the cost of the ""credits"" is increased part-way through the year (say, from $10 per credit to $20 per credit) or if a discount promotion is applied (buy 5 credits, get one free).  The customer has a ""tangible"" item (one credit) which gets the same functionality regardless of price.  This would be different if instead of ""credits"" you instead maintain an ""account"" where the user deposited $1000 and was billed for usage; in this case you fall back to the ""gift card"" scenario (but usage is charged at the current rate) and revenue is booked when the usage is purchased; similarly, tax is collected on the purchase of the service.  For this model to work, the ""credit"" would likely have to be refundable, and could not expire (see gift cards, above), and must be usable on a variety of ""services"".  You may have particular responsibility in the handling of this ""deposit"" as well."
I look at the following ratios and how these ratios developed over time, for instance how did valuation come down in a recession, what was the trough multiple during the Lehman crisis in 2008, how did a recession or good economy affect profitability of the company. Valuation metrics: Enterprise value / EBIT (EBIT = operating income) Enterprise value / sales (for fast growing companies as their operating profit is expected to be realized later in time) and P/E Profitability: Operating margin, which is EBIT / sales Cashflow / sales Business model stability and news flow Purchase accounting requires that you mark assets, including PP&amp;E to fair value.  So let's say you bought a machine 5 years ago for $1,000 - you might have depreciated it to $250 on your balance sheet but it might actually be worth $900. Personally I solve this by saving enough liquid capital (aka checking and savings) to cover pretty much everything for six months. But this is a bad habit. A better approach is to use budget tracking software to make virtual savings accounts and place payments every paycheck into them, in step with your budget. The biggest challenge you'll likely face is the initial implementation; if you're saving up for a semi-annual car insurance premium and you've got two months left, that's gonna make things difficult. In the best case scenario you already have a savings account, which you reapportion among your various lumpy expenses. This does mean you need to plan when it is you will actually buy that shiny new Macbook Pro, and stick to it for a number of months. Much more difficult than buying on credit. Especially since these retailers hate dealing in cash. "In the Income Statement that you've linked to, look for the line labeled ""Net Income"". That's followed by a line labeled ""Preferred Dividends"", which is followed by ""Income Available to Common Excl. Extra Items"" and ""Income Available to Common Incl. Extra Items"". Those last two are the ones to look at. The key is that these lines reflect income minus dividends paid to preferred stockholders (of which there are none here), and that's income that's available to ordinary shareholders, i.e., ""earnings for the common stock""." Given that the laws on consumer liability for unauthorized transactions mean no cost in most cases, the CVV is there to protect the merchant.  Typically a merchant will receive a lower cost from their bank to process the transaction with the CVV code versus without. As far as the Netflix case goes, (or any other recurring billing for that matter) they wouldn't care as much about it because Visa/MC/Amex regulations prohibit storage of the CVV.  So if they collect it then it's only used for the first transaction and renewals just use the rest of the card info (name, expiration date, address). Does the presence of CVV indicate the merchant has better security?  Maybe, maybe not.  It probably means they care about their costs and want to pay the bank as little as possible to process the transaction. I don't believe you would be able to with only Net Sales and COGS.  Are you talking about trying to estimate them?  Because then I could probably come up with an idea based on industry averages, etc.  I think you would need to know the average days outstanding, inventory turnover and the terms they're getting from their vendors to calculate actuals.  There may be other ways to solve the problem you're asking but thats my thoughts on it. "It depends on the definition of earnings.  A company could have revenue that nets in excess of expenses, so from that perspective a good cash flow or EBITDA, but have debt servicing costs, taxes, depreciation, amortization, that alters that perspective. So if a company is carrying a large debt load, then the bondholders are in the position to capture any excess revenues through debt service payments and the company is in a negative equity positions (no equity or dividends payable to shareholders) and has not produced earnings. If a company has valuable preferred shares issued and outstanding, then depending on the earnings definition, there may be no earnings (for the common stock) until the preferences are satisfied by the returns. So while the venture itself (revenues minus costs) could be cash flow positive, this may not be sufficient to produce ""earnings"" for shareholders, whose claim on the company still entitles them to zero current liquidation value (i.e. they get nothing if the company dissolves immediately - all value goes to bondholders or preferred).  It could also be that taxes are eating into revenue, or the depreciation of key assets is greater than the excess of revenues over costs (e.g. a bike rental company by the beach makes money on a weekly basis but is rusting out half its stock every 3 months and replacement costs will overwhelm the operating revenues)." "Thanks for the response.   I am using WRDS database and we are currently filtering through various variables like operating income, free cash flow etc.  Main issue right now is that the database seems to only go up to 2015...is there a similar database that has 2016 info?  filtering out the ""recent equity issuance or M&amp;A activity exceeding 10% of total assets"" is another story, namely, how can I identify M&amp;A activity? I suppose we can filter it with algorithm stating if company's equity suddenly jumps 10% or more, it get's flagged" "One thing to keep in mind is that Prime day takes away sales from other days (maybe the two days leading up to and two days after). It would be interesting to see sales numbers by day around Prime Day and compare them to ""average"" days and see if customers bought less.   Also, I assume the $1bn is Net Sales and not Gross Merchandise Volume." "I recently needed to compute a better balance that let us pick and choose what to include in the computed sum without losing information, so I revisited this topic and I'm pleased to say that I've found a solution that works (at least for our data - you may have transactions that this code doesn't recognize, but you can always modify it to match). My solution was written natively for MS SQL Server 2008 or later, it uses a scalar UDF, a VIEW, and a windowed aggregate (SUM OVER (ORDER BY ...) which means it should be almost-syntax compatible with PostgreSQL. MySQL does not support OVER but you can perform a running-sum using a variable with arithmetic addition directly in the SELECT clause. Create a database table with this schema (feel free to exclude columns you're not interested in, such as Option1Name): Create a UNIQUE index on TxnId - you could use it as a primary-key, I suppose. You might be tempted to create a Foreign-Key relationship between ReferenceTxnId and TxnId, however this will fail if you enforce it: we have many transactions where ReferenceTxnId points to a Transaction that doesn't exist. This is usually in the case of [Type] = 'Web Accept Payment Received' AND [Status] = 'Canceled'. We also have some TransactionId values longer than 17 characters: some TransactionIds start with ""U-"" - all pending money requests, I suspect this indicates the transaction is ""unfinished"". Re-download your entire PayPal History CSV files so that you have the latest retroactive updates. Import these CSV files into this PayPalHistory table. Do a simple test to see how bad PayPal's default data is: To find out where the differences are coming from, run this query: (The ORDER BY (...), RowId is to ensure consistent ordering when multiple transactions share the same timestamp) As you scroll through the results, you'll see how the naive SUM is thrown-off from the official PayPal-computed Balance column. So as you can see, the Net column value cannot always be trusted - what we need is to generate our own ""EffectiveNet"" value which is accurate - that is, the value is 0.00 for rows which do not affect the balance, instead of being what they are right now. The problem is, given a single row of data (such as any single row from the example table in my original Question) we have no way of inherently knowing what its ""EffectiveNet"" is. I have devised two functions to help solve this problem, the first function only looks at the ReferenceTxnId, Type and Status column values and generates accurate values for the vast majority of rows - indeed, in our dataset we only had one row for which this approach did not work. I recommend you try this one first and compare the running-sum value to ensure it works for your data: You can use this function in the query like so below, hopefully it should give you an accurate running-sum and balance figure at the end: 8. And here's the view that ties it all together: Used like so: I hope this helps anyone else wanting to do accurate bookkeeping with PayPal Transaction History files!" No, it would not show up on the income statement as it isn't income. It would show up in the cash flow statement as a result of financing activities. "Debits' and ""Credits"" are terms used in double-entry bookkeeping. Each transaction is entered in two different places to be able to double-check accuracy. The total debits and total credits being equal is what makes the balance sheet balance. For explaining debits and credits, wikiversity has a good example using eggs that I found helpful as a student.  Debits and Credits  When a financial transaction is recorded, the Debits (Dr) and Credits (Cr) need to balance in order to keep the accounts in balance.  An easy rule to remember is, ""Debit the Asset that Increases""  For example, if you want to practice accounting for cooking a simple breakfast, you might proceed as follows:  To record breaking the eggs and putting the eggs in the frying pan  In this transaction, an asset, (the egg) is split into parts and some of the asset goes in the pan and some in the trash. A Debit (Dr) is used to show that the assets in the pan and the trash both increase. A balancing Credit (Cr) is used to show that the amount of assets (whole eggs) in the egg carton has decreased.  This transaction is in balance because the total Credits equal the total Debits. Everything that is covered by the Debits (yolk, white and shell) is also covered by the Credits (one whole egg)" Some personal finance packages can track basis cost of individual purchase lots or fractions thereof. I believe Quicken does, for example. And the mutual funds I'm invested in tell me this when I redeem shares. I can't vouch for who/what would make this visible at times other than sale; I've never had that need. For that matter I'm not sure what value the info would have unless you're going to try to explicitly sell specific lots rather than doing FIFO or Average accounting. Lets say Debit is what you pay and Credit is what somebody else pays for you. A Debit card will charge your bank account directly. A Credit card will charge your bank account some time later. In both cases the shop owner has the money available directly. It's called Credit because somebody believes you will be able to pay your debt on time (or later with an interest). As for purchase and sales. A customer buys = makes a purchase. A shopkeeper sells = makes a sale. Note from a bar: I made an agreement with the bank. They don't sell beer, I don't give Credit. One explanation is that movie patrons are considering their total willingness to pay for the movie experience so that if the ticket price plus the market price of popcorn is less than their willingness to pay (WTP), the theater has an opportunity to extract more consumer surplus by charging higher than market prices for the popcorn (that is, price discrimination). There is a working paper on the subject by Gill and Hartmann (2008), the abstract of which reads: Prices for goods such as blades for razors, ink for printers and concessions at movies are often    set well above cost.  Theory has shown that this could yield  a profitable price discrimination    strategy often termed “metering.”  The idea is that a customer’s intensity of demand for    aftermarket goods (e.g. the concessions) provides a meter of how much the customer is willing to    pay for the primary good (e.g. admission).  If this correlation in tastes for the two goods is    positive, a high price on the aftermarket good allows firms to extract a greater total price    (admissions plus concessions) from higher type  customers.  This paper develops a simple    aggregate model of discrete-continuous demand to motivate how this correlation can be tested    using simple regression techniques and readily available firm data.  Model simulations illustrate    that the regressions can be used to predict whether aftermarket prices should be above, below or    equal to their marginal cost.  We then apply the approach to box-office and concession data from    a chain of Spanish theaters and find that high priced concessions do extract more surplus from    customers with a greater willingness to pay for the admission ticket.  Locay and Rodriquez (1992) make a similar argument in a JPE article.  They essentially argue that purchases of things like movie tickets are made by groups; once individuals are constrained by the group's choice, the firm has additional market power: We present models in which price discrimination in the context of  a   two-part price can occur in some competitive markets. Purchases  take   place in groups, which choose which firms to patronize. While  firms   are perfectly competitive with respect to  groups, they have  some   market power over individual consumers, who are constrained  by their   groups' choices. We find that firms will charge an entry fee  that is    below marginal cost,  and  the  second part of  the  price is  marked   up  above marginal cost. The  markup not only is positive  but   increases with the quality of the product. The quote you are looking for is similar, and again attributes the discrepancy to price discrimination.  From the Armchair Economist (p. 159): The purpose of expensive popcorn is not to extract a lot of money from   customers. That purpose would be better served by cheap popcorn and   expensive movie tickets. Instead, the purpose of expensive popcorn is   to extract different sums from  different customers. Popcorn lovers,   who have more fun at the movies, pay more for their additional   pleasure. That is, some people like popcorn more than others.  The latter idea is that the movie experience for popcorn lovers is worth more than the sum of its parts: that a movie ticket + popcorn is worth more than either of them separately for some people.