Dear Mr. CEO,
In response to your question concerning the use of gift cards for the firm, our team compiled research and concluded that, keeping caution and conservatism in mind, allowing the use of gift cards, certificates and other store value systems would be highly beneficial.
Generally, opting to use gift cards (denoted GC) boosts sales revenue and provides flexibility in determining when and where to record these new inflows in our financial statements. Foremost, GCs provide our firm with a new revenue-generating product. The real benefits follow the initial sale of GCs: secondary cash flows and transactions occur when a consumer returns to use a GC.
If intended as gifts, GCs improve the number of consumers and sales. A normal purchase involves one consumer, whereas two consumers are required in the GC-process: the giver and receiver—this doubles opportunities for sales. GCs act as buffers for products not normally in consumers’ price-ranges, and thus encourage purchases beyond the value of the GC.
If GCs’ values are not exhausted, the remaining balances improve our revenues in the form of breakage—revenue from unredeemed GCs. Breakage provides the firm with a delayed system of revenue recognition, and thus more flexibility to influence our financial statements, as will later be discussed.
The process of recording a GC sale: * Debit Cash, Credit a Liability account i.e. “Deferred Revenue”
The process of recording a purchase…