Reading & Interpreting Nordstrom's Notes-Revenue Recognition. The following excerpt is taken from Note 1 on page 42 of Nordstroms Form 10-K for the fiscal year ended January 28, 2012: NET SALES: We recognize revenue from sales at our retail stores at the point of sale, net of estimated returns & excluding sales taxes. Revenue from our sales to customers shipped directly from our stores & our online & catalog sales includes shipping revenue, when applicable, & is recognized upon estimated receipt by the customer. We estimate customer merchandise returns based on historical return patterns & reduce sales & cost of sales accordingly. The following excerpt on page 44 is from the same note: GIFT CARDS: We recognize revenue from the sale of gift cards when the gift card is redeemed by the customer, or we recognize breakage income when the likelihood of redemption, based on historical experience, is deemed to be remote.

1. Assume that you buy a gift card for a friend. Identify & analyze the transaction Nordstrom records at the time you buy the card. NOTE: there should be one answer for ACTIVITY, STATEMENT(S) & ACCOUNTS

Activity:

A. Operating

B. Investing

C. Financing

Statement(s):

A. Balance Sheet

B. Income Statement

C. Both

Accounts:

A. Cash Increase, Gift Card Liability Increase

B. Cash Increase, Gift Card Liability Decrease

C. Cash Decrease, Gift Card Liability Increase

D. Cash Decrease, Gift Card Liability Decrease

2. How does this entry affect the accounting equation? NOTE: If a financial statement item is not affected, select "No Entry" & leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Be sure to pick between Cash, Gift Card Liability or No Entry

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders' Equity

Revenues

Expenses

=

Net Income

_________________

_________________

_________________

_________________

_________________

_________________

_________________

_________________

Assets:

A.Cash

B. Gift Card Liability

C. No Entry

Liabilities:

A.Cash

B. Gift Card Liability

C. No Entry

Revenues:

A.Cash

B. Gift Card Liability

C. No Entry

Expenses:

A.Cash

B. Gift Card Liability

C. No Entry

3. Identify & analyze the adjustment Nordstrom records when your friend redeems the card. NOTE: there should be one answer for ACTIVITY, STATEMENT(S) & ACCOUNTS

Activity:

A. Operating

B. Investing

C. Financing

Statement(s):

A. Balance Sheet

B. Income Statement

C. Both

Accounts:

A. Gift Card Liability Increase, Sales Revenue Increase

B. Gift Card Liability Increase, Sales Revenue Decrease

C. Gift Card Liability Decrease, Sales Revenue Increase

D. Gift Card Liability Decrease, Sales Revenue Decrease

4. How does this entry affect the accounting equation? NOTE: If a financial statement item is not affected, select "No Entry" & leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Be sure to pick between Sales Revenue, Gift Card Liability or

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders' Equity

Revenues

Expenses

=

Net Income

_________________

_________________

_________________

_________________

_________________

_________________

_________________

_________________

Assets:

A. Sales Revenue

B. Gift Card Liability

C. No Entry

Liabilities:

A. Sales Revenue

B. Gift Card Liability

C. No Entry

Income Statement: Revenues Expenses = Net Income

Revenues:

A. Sales Revenue

B. Gift Card Liability

C. No Entry

Expenses:

A. Sales Revenue

B. Gift Card Liability

C. No Entry