Reading and Interpreting Nordstrom's Notes- Revenue Recognition
The following excerpt is taken from Note 1 on page 42 of Nordstrom's Form 10-K for the fiscal year ended January 28, 2012:
Net Sales
We recognize revenue from sales at our retail stores at the point of sale, net of estimated returns and excluding sales taxes. Revenue from our sales to customers shipped directly from our stores and our online and catalog sales includes shipping revenue, when applicable, and is recognized upon estimated receipt by the customer. We estimate customer merchandise returns based on historical return patterns and reduce sales and cost of sales accordingly.
The following excerpt on page 44 is from the same note:
Gift Cards
We recognize revenue from the sale of gift cards when the gift card is redeemed by the customer, or we recognize breakage income when the likelihood of redemption, based on historical experi- ence, is deemed to be remote.
Required
1. According to the note, when does Nordstrom recognize revenue from sales in its retail stores? How does this differ from the way the company recognizes revenue from sales to cus- tomers shipped directly from its stores, its catalog, and online sales? Why would the way in which revenue is recognized from these three types of sales differ?
2. According to the note, how does Nordstrom recognize revenue associated with its gift cards? Assume that you buy a gift card for a friend. What entry does Nordstrom make at the time you buy the card? What entry does Nordstrom make when your friend redeems the card?