Financial Reporting
Case #: Groupon’s Growing Pains and the SEC
Instructions: To help organize your thoughts and conclusions regarding the Groupon cases, this template should be used
as your Case # submission. Text boxes are setup for you to complete with your answers – “Click here to enter text.”
Case Requirements
1. Compare and contrast the business model of Groupon with the business models of Amazon and Walmart. (Limit
your response to 5-6 sentences in the text box below.)
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Refer to the risk factors in the MD&A sections of each company’s 10-Ks, then compare the significant risks and
opportunities across these companies. How do these business risks translate to risks in financial reporting? (Use
the tables below to complete this question.)
In the left column, identify relevant risk factors for Amazon and Walmart. In the right column,
compare those risk factors to those of Groupon, and explain how the business risk translates into
financial statement risk. (Note: You have the opportunity to select from the risk factors listed in Item
1A of the 10-K Annual Report. amzn-1A , wmt-10k- 1A from 20.P. )
Amazon’s Risk Factors
Identify four to five relevant risk factors in
Amazon’s MD&A section of the 10-K and list
them here.
1.
2.
3.
4.
5.
Walmart’s Risk Factors
Identify four to five relevant risk factors in
Walmart’s MD&A section of the 10-K and list
them here.
1.
2.
3.
4.
5.
2. “Revenue and revenue growth are more important than income and income growth in new businesses, especially
in the new-age economy.” Do you agree with this statement? Support your opinion by analyzing the relationship
between Amazon’s revenue, income and stock price from 1997 to 2010. (Data charts and tables provided.)
400
200
0
97 98 99 0 1 2 3 4 5 6 7 8 9 10
-200
-400
-600
-800
Revenue
Income
Stock Price
Year
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Net income
Stock
(loss)
Total Net sales
price
$ 1,152,000.00 $ 34,204,000.00 $ 180.00
302,000
24,509,000
134.52
645,000
19,166,000
51.28
476,000
14,835,000
92.64
190,000
10,711,000
39.46
359,000
8,490,000
47.15
588,000
6,921,000
44.29
35,000
5,264,000
52.62
(149,132)
3,932,936
18.89
(567,277)
3,122,433
10.82
(1,411,273)
2,761,983
15.56
(719,968)
1,639,839
76.13
(124,546)
609,819
53.54
(31,020)
147,787
5.02
Annual
Percentage
Change
34%
162%
-45%
135%
-16%
6%
-16%
179%
75%
-30%
-80%
42%
967%
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3. Using the data provided in Tables 1 & 2, prepare common size income statements using revenues and cost-of-goodssold in the original S-1 and amended S-1. Analyze trends of expenses as a percentage of revenue for 2009 and 2010.
Compare and contrast the following ratios:
a. Gross margin percentage;
b. Asset turnover ratio.
TABLE 1: Abridged Income Statements for Groupon (in millions)
Income Statement Account
Revenue
Cost of sales
Gross margin
TABLE 2: Balance Sheet - Assets Section (in '000s)
2009
2010
Gross
Net
Gross
Net
$ 30.4 $ 14.5 $ 713.4 $ 312.9
19.50
4.40
433.40
32.50
10.90
10.10
280.00
280.40
Marketing expense
General and admin expense
Other expenses
Net loss
Net loss to common shareholders
EPS (Basic)
4.60
7.50
(1.34)
(6.92)
(0.04)
4.90
6.40
(1.09)
(6.92)
(0.04)
263.20
233.90
203.20
(413.40)
(456.30)
(2.66)
284.30
213.30
203.20
(420.10)
(456.30)
(2.66)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses and other current assets
2009
$
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Deferred income taxes, non-current
Other non-current assets
TOTAL ASSETS
$
2010
12,313 $
601
1,293
118,833
42,407
12,615
14,207
274
239
242
173,855
16,490
132,038
40,775
14,544
3,868
14,962 $
381,570
Complete the following tables to answer this question: (I recommend copying the tables in Excel, calculating the ratios
then pasting them below.)
2009
Income Statement Account
Gross
Revenue
100%
Cost of sales
Gross margin
Marketing expense
General and admin expense
Other expenses
Net loss
Net loss to common shareholders
EPS (Basic)
Net
100%
2010
Gross
Net
100%
100%
Financial Ratios
Gross method
Gross margin percentage
Asset turnover ratio
Net method
Gross margin percentage
Asset turnover ratio
2009
2010
4. Do not answer question four.
5. Groupon had recognized revenue for the sale of high-ticket items in late 2011. Purchasers of the Groupons have a
right of return, as specified in the “Groupon Promise,” prominently featured on its website.
a. Assess the U.S. GAAP requirement for revenue recognition when right-or-return exists, specified in ASC Section
604-15-25, in the context of Groupon’s business model.
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b. Do you agree with Groupon’s accounting? Why or why not?
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c. What could Groupon have done differently, and how would the financial statements have been affected?
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6. Groupon’s restatement of 2011 fourth-quarter financials resulted in a reduction of $14.3 million of revenues and a
decrease of $30 million of operating income. However, its operating cash flow was unaffected. Explain how this is
possible.
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7. Do not answer question seven. It will be discussed in class on 11/9/2015.
8. In its initial S-1 filing, Groupon presented a non-GAAP performance metric called ACSOI. It was subsequently
removed after the SEC objected.
a. Why did the SEC question the inclusion of ACSOI in Groupon’s financial statements?
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b. Non-GAAP metrics are common in some industries. These include: Value-at-Risk in the financial sector, samestore-sales in retail, revenue-passenger-miles for airlines, and order-backlog in the semiconductor industry.
Explain two of these metrics and assess their value to financial statement users.
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c. While the SEC allows the reporting of metrics identified in (b), it did question the use of ACSOI. What differences
between the acceptable non-GAAP metrics in (b) and ACSOI were of concern to the SEC?
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d. Do you agree with Groupon’s contention that discretionary expenses, such as subscription acquisition costs,
should be excluded from the financial measures of a company’s performance?
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9. Groupon’s management needed significant cash to fund its growth. It had three options: (A) Seek private
investment, (B) sell the company to Yahoo! or Google, or (C) go public.
a. Contrast the financial reporting challenges across the three options In March 2012, Groupon’s auditors noted a
material weakness in the company’s internal controls related to ‘‘deficiencies in the financial statement close
process.’’ Would this disclosure have been made if Groupon had chosen options (A) or (B)?
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10. In your opinion, do the problems with Groupon’s choice of accounting methods, use of a non-GAAP metric, and
material weakness in its internal control reflect a lack of management experience or a lack of management
integrity?
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