The Following Disclosure Note Appeared in a Recent Annual Report

question 213

Essay

The following disclosure note appeared in a recent annual report to stockholders of Dell Inc., the computer manufacturer: "Net revenue includes sales of hardware, software and peripherals, and services (including extended service contracts and professional services). These products and services are sold either separately or as part of a multiple-element arrangement. Dell allocates fees from multiple-element arrangements to the elements based on the relative fair value of each element, which is generally based on the relative list price of each element. For sales of extended warranties with a separate contract price, Dell defers revenue equal to the separately stated price. Revenue associated with undelivered elements is deferred and recorded when delivery occurs. Product revenue is recognized, net of an allowance for estimated returns, when both title and risk of loss transfer to the customer, provided that no significant obligations remain. Revenue from extended warranty and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract or when the service is completed. Revenue from sales of third-party extended warranty and service contracts, for which Dell is not obligated to perform, is recognized on a net basis at the time of sale."
Briefly explain why Dell Computer recognizes revenue at different times for (a) product sales, (b) extended warranty and service contracts for which Dell is obligated to perform, and (c) extended warranty and service contracts for which a third party is obligated to perform.

---

Definitions:

Normal Population

A population distribution that follows a normal (Gaussian) curve, where all measures of central tendency (mean, median, and mode) are equal and most of the data falls close to the mean.

Significance Level

A threshold in hypothesis testing that determines the probability of rejecting a true null hypothesis, usually denoted as alpha (α).

Chi-squared Test

An analytical tool designed to assess if the observed frequencies differ significantly from those that were expected in one or more categories.

Normal Distribution

The distribution exhibits a symmetrical pattern centered on the mean, demonstrating the more common appearance of close-to-mean data than those at a distance.