Google's Financial Results First Quarter 2011 ( Simplified )

April 14, 2011, Google Inc. Top USA Internet Company announced First Quarter 2011 Financial Results. In these results, there are four things, one is financial summary, second is latest balance sheet after three months changes, income statement for 1 Jan. to 31st March 2011 and cash flow statement. Today, I studied all these latest financial results more than two hour. For helping, investor, general public and accounting researchers and lovers, I am trying  to simplify its some of accounting terms.

1. Total Revenue Simplified

a. # Google reported revenues of $8.58 billion for the quarter ended March 31, 2011, an increase of 27% compared to the first quarter of 2010.  Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC).  In the first quarter of 2011, TAC totaled $2.04 billion, or 25% of advertising revenues.

b. #  Revenues from outside of the United States totaled $4.57 billion, representing 53% of total revenues in the first quarter of 2011

c. # Revenues from the United Kingdom totaled $969 million, representing 11% of revenues in the first quarter of 2011, compared to 13% in the first quarter of 2010.

2.   Traffic Acquisition Costs

 As per company's detail traffic acquisition cost  totaled $2.04 billion and company did not deducted this amount from his gross revenue which is $8.58 billion. Why? For this, I was interested to know what is traffic acquisition cost.  Traffic acquisition costs is  mainly paid amount to company's partners. They may be AdSense, YouTube or even others. For example,  Google pays some large amount of money annually to the Mozilla Foundation to be the default search engine in the search box on the Firefox browser. This is a great demographic. And this is also TAC for Google. Link  If we deduct $2.04 billion from gross revenue of Google, we can find net revenue which is $6.54.

3. Google reports operating income, operating margin, net income, and earnings per share (EPS) on a GAAP and non-GAAP basis. 

For preparing and presenting financial statements, USA company has to follow some accounting rules. That is the reason, google's operating income, operating margin, net income and EPS is different on GAAP and on Non -GAAP. Google is showing both way because, it may be possible any foreign investor who invested in Google, can take idea of earning of three months without any effect of GAAP.

4. Gains related to our foreign exchange risk management program.

In the first quarter of 2011, Google recognized a benefit of $14 million to revenues through our foreign exchange risk management program, compared to a benefit of $10 million in the first quarter of 2010. Actually, this programme has been made to eliminate all risks, negative exchange outcomes and to preserve the value of currency inflows, investments and loans. I think, company is using demanding hard currency, diversifying properly and employing hedging strategies.

5. Data center operational expenses

Google has included data center operational cost in Other Cost of Revenues. Data center operational expenses are those which are paid for electric bill. Google may be large number of servers, storage devices and network equipments. For cooling them, google offices  needs AC and its electric bill will be the data center operational cost. Company did not mention exact of this cost but overall other cost of revenue has  increased to $897 million, or 10% of revenues, in the first quarter of 2011.

6. Amortization of intangible assets

Amortization of intangible assets also includes in other cost of revenue of Google in first quarter 2011. It means consumption cost of intangible assets. It is just like the depreciation on intangible assets. Let me explain, for example company has 100$ intangible asset at the end of year due to obsolescence or any other reason, its value may be 80$. Then, 20$ will be amortization of intangible assets. Google is showing net intangible assets in balance sheet after deducting amortization. In income statement, it has been included in other cost of revenue.

7. Content acquisition costs

This has been also included in other cost of revenue in google's income statement. There is big difference between traffic acquisition cost and content acquisition cost. According to my thinking, Google has to pay for obtaining content from studios, distributors and other suppliers through direct purchases or pay to writers who writes contents for Google. It is duty of its financial analyst to Coordinate Content Acquisition Costs (CAC) month end close and payments processes with Accounting and Sales.

8. Credit card processing charges

It is also part of its other cost of revenue. There are two types of these charges, one is an interchange fee, which is the fee the credit card companies charge for each transaction and other is an additional fee charged by your merchant service provider, which may be the merchant bank on on each credit card sale.

9. Total charge related to SBC

SBC means Stock-Based Compensation. In the first quarter 2011, In the first quarter of 2011, the total charge related to SBC was $432 million, compared to $291 million in the first quarter of 2010.    Stock Based Compensation is share based payment, is remuneration offered to an employee by way of an option to purchase shares in the employing company at a discounted rate at a future point in time. This is a common method used by corporations to compensate executives. Google Inc. has included it in cost of revenue and it is $ 49 million in first quarter 2011.  

10.  IT infrastructure investments, including data centers, servers, and networking equipment

In the first quarter of 2011, capital expenditures were $890 million, the majority of which was related to IT infrastructure investments, including data centers, servers, and networking equipment. For calculating net cash flow, it is necessary to compare inflow and outflow of cash in investing activity. Purchases of property and equipment is just outflow of cash example in investing activity.

11. Free cash flow

Company has explained  free cash flow as Non- GAAP measure of liquidity, is defined as net cash provided by operating activities less capital expenditures. It means net amount which we receive from our business activity after deducting all cash capital expenditures.

12. Prepaid revenue share - non current asset

I also saw a new term in google's financial result that is prepaid revenue share ( Non current Asset). All guys of accounting may easily understand any prepaid expenses are the part of current asset because we have to pay to other before getting work from other over a year.  But sometimes prepaid expenses might be amortized over a period longer than a year after the balance sheet date. In such cases, the portion which is to be amortized to expenses after one year after the balance sheet date is considered non-current and presented in the non-current assets section on the balance sheet. That is the reason, Google's accountant has shown prepaid revenue share as non current asset.






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Accounting Education: Google's Financial Results First Quarter 2011 ( Simplified )
Google's Financial Results First Quarter 2011 ( Simplified )
Accounting Education
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