Goliath ProductionsStudent Coaching Slides

Did Goliath breach

the contract?

• Argue both sides

• Cite supporting authority

• Standard: What were the parties’ reasonable expectations?

Courts seek to preserve, not invalidate agreements

• Don’t sidestep the issues by saying there’s no agreement

• Promote fairness where it appears there was agreement

• Discuss policy that agreements generally must be enforceable in order to promote commerce

What did the parties intend at the time they entered the contract?

Giant’s argument: They were granted the right to exclusively show the films without any geographical limitation.

Goliath’s argument: A geographical limitation is implied; presumably Giant’s exclusivity is extended only to their market, i.e. the U.S.

Budgeted Revenues

• Sources of revenue in case – Contract fees– Exhibition fees

• Exhibition fees = Revenue per showing × number of showings

– Budgeted showings should include the expected maximum of Kombat Rex and the minimum for KR11-V

Revenue Recognition Criteria

• Per GAAP, revenue is recognized when it is:– Realized or realizable– Earned

Realized & Realizable

• Realized—cash has been received.• Realizable—a claim to cash or a near cash item

has been received, e.g., accounts or note receivables. The company giving the claim to cash must have the ability to pay.

• Question—Is there any doubt about Giant’s ability to pay their contracted amounts?

Earned

• Earned means that your company has performed the most important tasks in the earnings process.

– This usually means that you’ve delivered the merchandise or rendered the service to the customer.

– In this case it means that your team must evaluate what tasks must be performed to recognize each source of revenue (contract and exhibition fees.)

Contract Fees

• What was the contract fee of $5,000,000 for?– The exclusive right to the films?– The signing of the contract?– Additional amounts for showing films?

• Your answer impacts when revenue will be recognized for contract fees.

Exhibition Fees

• Exhibition fees are earned ($500) each time a movie is shown according to contract terms.

• Question—Is Giant showing the movies according to contract terms? Study their audited statement of showings dated December 31, 2006.

• Revenue measures the amount that you have earned through providing goods and services to customers, regardless of whether you have received payment in cash.

• Cash flow measures the amount of cash received. They represent real increases in your bank balance that you can spend.

Revenue vs. Cash Flow