09Class03A

09Class03A - Question 5 is the heart of the case and the...

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Question 5 is the heart of the case and  the  critical Fortune article on Pre-Paid Legal  Services   Does the PPLS accounting for sales  commissions reflect economic reality?  1
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Preview of  Question 5.   PPLS Commission policy 1. Sales associates get 25 % commissions on sales.  1. Sales associates are paid for 3 years up front. 3.  If a customer cancels before 3 years, sales  associate is asked to repay 50% of unearned  commission. 4. It is estimated that 25 % of the repayment in 3 above  won’t be recovered by PPLS. 2
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Example from the case Sales associates sign up 1,000 members, 75 % resign for year 2, and 75% of those resign for Year 3. Year 1 Year 2 Year 3 Comment Members 1,000 750 562.5 Members premium $228,000 $171,000 $128,250 $19 a month Commissions paid $171,000 Recovered Cash $10,688 $4,008 10,688 = 250 (1,000-750) times $228 times 0.25 (commission rate) time 0.5 times 0.75 (recovery rate) times 2 (years 2 and 3) 3
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The statement of cash flows describes the annual  flows of cash and is divided into three sections: Cash flows from operations Cash flows from investing activities, and Cash flows from financing activities 4
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Sale or purchase of property, plant and  equipment. Sale or purchase of the debt or equity of other  firms Financing Cash Flows: Issuance or repayment of the company’s own  debt. Issuance or buyback of the company’s own stock,  paying cash dividends. 5
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09Class03A - Question 5 is the heart of the case and the...

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