Academic journal article Issues in Accounting Education, Inc

Academic journal article Issues in Accounting Education, Inc

Article excerpt

This case, based on the activities of a fictional online grocery shopping and delivery service startup, introduces beginning M.B.A. students to financial accounting. The case write-up provides cash inflows and outflows and other detailed information about the firm's first three years of operations, which include sizable expenditures to develop customer order-entry software. Using this information, you are required to prepare comparative accrual-basis financial statements and to explore the impact of alternative accounting treatments on these financial statements for software development expenditures. The purpose of this case is to provide you with an appreciation for financial statements as a device for communicating the firm's financial position and performance, to illustrate some of the problems and ambiguities that arise in implementing accrual accounting, to expose you to the interpretation of actual accounting standards, and to introduce you to the use of historical financial statements in pred icting future earnings.

BACKGROUND, Inc. (SWD) is an online grocery shopping service operating in the Maryland suburbs of Washington, D.C. SWD customers order groceries over the World Wide Web (WWW) using software created by the company. The software draws on a database that is updated daily, and that contains current prices, product weight and volume data, and nutritional information for all items available in the nearest participating Mammoth Supermarket. After selecting a grocery order, which typically requires about 20 minutes of pointing and clicking, the customer specifies a 90-minute delivery time slot, and SWD does the rest.

The customer's order is transmitted to an SWD shopper at the relevant Mammoth Supermarket store. The shopper fills the order from stock in the store at a time just before the customer-specified delivery period, checks the order through a cashier, and helps an SWD driver pack the order in specially designed containers that keep frozen foods frozen, crushable foods uncrushed, etc. The driver then delivers the order to the customer. SWD bears responsibility for any losses or damages incurred during grocery delivery.

In exchange for this service, the customer pays SWD a monthly membership fee of $5.95. In addition, for each order the customer pays (1) the store price of the groceries ordered, (2) a flat fee of $6.95, and (3) 5 percent of the store price of the groceries ordered. The monthly membership fee is charged to the customer's credit card at the beginning of each month. All per-order amounts are charged to the customer's credit card on the date of purchase.

Shopping Without Dropping, Inc. was formed at the beginning of 1998 by R. Smith, an advertising executive, and G. Allen, an ex-supermarket manager and recent M.B.A. graduate. During 1998, SWD developed and tested its WWW-based order-entry system. During the same period, the company negotiated a cooperative arrangement with Mammoth Grocers, Inc., the dominant D.C.-area supermarket chain. Under this agreement, SWD agreed to focus all D.C.-area operations exclusively on Mammoth stores, while Mammoth agreed to facilitate SWD's order processing, and to provide daily feeds of inventory and price data for each participating store at a nominal cost.

In January 1999, SWD formally began operations at four participating Mammoth stores in Montgomery and Howard Counties. By the end of 2000, the company's operations encompassed 12 participating stores in four counties, providing the capability to reach about 70 percent of the potential customers in Washington's Maryland suburbs. SWD served (on average) about 3,000 customers during 1999, and about 10,000 customers during 2000. Experience over these two years showed that SWD's customer retention rate is extremely high, partly due to a very positive response to the company's customer software interface, and partly because customers' orders are processed with fanatical care by SWD's highly paid shoppers and drivers. …

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