The following excerpt is taken from Note 1 on page 38 of Nordstrom’s 2008 10K (amounts are in millions of dollars):
We record revenues net of estimated returns and we exclude sales taxes. Our retail stores record revenue at the point of sale. Our catalog and online sales include shipping revenue and are recorded upon estimated receipt by the customer. We recognize revenue associated with our gift cards upon redemption of the gift card. As part of the normal sales cycle, we receive customer merchandise returns. To recognize the financial impact of sales returns, we estimate the amount of goods that will be returned and reduce sales and cost of sales accordingly. We utilize historical return patterns to estimate our expected returns. Our sales return reserves were $70 and $56 at the end of 2008 and 2007.
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 its catalog and online sales? Why would the way in which revenue from these two 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. Identify and analyze the transaction Nordstrom records at the time you buy the card. Identify and analyze the adjustment Nordstrom records when your friend redeems the card.