The Following Footnote Appeared in a Recent Annual Report to Stockholders

question 21

Essay

The following footnote 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 these three types of revenue at different points in time.

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Definitions:

Mutually Exclusive

Two events that cannot occur at the same time, indicating no overlap in possible outcomes.

Independent

The condition where the occurrence or outcome of one event does not affect the occurrence or outcome of another event.

P(A / B)

Represents the conditional probability of event A occurring given that event B has occurred.

Missile

A guided weapon system designed to deliver a payload from a source to a target at high velocities.