From Fortune Magazine March 27 2000.

Net vs. gross

Many Internet firms "gross up" their revenues by reporting the entire sales price a customer pays at their site when in fact the company keeps only a small percentage of that amount.

Take Priceline.com, the company made famous by those William Shatner ads about "naming your own price" for airline tickets and hotel rooms. In its most recent quarterly SEC (Securities Exchange Commission) filings Priceline reported that it earned $152 million in revenues. But that includes the full amount customers paid for tickets, hotel rooms, and rental cars. Traditional travel agencies call that amount "gross bookings," not revenues. And much like regular travel agencies, Priceline keeps only a small portion of gross bookings-namely, the spread between the customers' accepted bids and the price it paid for the merchandise. The rest, which Priceline calls "product costs," are paid to the airlines and hotels that supply the ticket and rooms.In the most recent quarter, those costs came to $134 million, leaving the Priceline just $18 million of what it calls "gross profit" and what most other companies would call revenue. And that's before all of Priceline's other costs-like advertising and salaries-which netted out to a loss of $102 million. The difference isn't academic: Priceline currently trades at about 23 times its reported revenue but at a mindboggling 214 times its "gross profit."

Priceline says it counts gross bookings as revenue because, unlike a travel agency, it has assumed the full risk of ownership as the "merchant of record" and can determine the size of its spread. Travel agencies, on the other hand, have a fixed commission and do not own tickets they sell. So far the SEC has given the not to Priceline's logic.

Barter

When Star Media Network, a prominent Latin American Web portal, announced is third-quarter results on Oct. 26 its press release boasted of the company's impressive growth-revenues up to 44% from the prior quarter, to $5.6 million. What the press release didn't say was that 26% of that $5.6 million.didn't represent real cash. Instead, it was barter revenue-Star Media had exchanged advertising space on its Web pages for ads on television and radio.

Coupons, discounts, and loss leaders.

Fledgling e-commerce companies know that nothing draws potential customers like free stuff-hence the proliferation of give-aways, special introductory offers, deep discounts cupons and rebates on the Web. Nothing wrong there. But to the consternation of the SEC, some Net companies have discovered ways to hide the effect all the free stuff has on sales. For instance, let's say a customer buys a $50 sweater using an electronic coupon that entitles her to 20% off.

The customer pays only $40, but some companies record the full$50 in revenue and simply take a $10 charge under "marketing expences". Again, there's no effect on the bottom line-which, in case of so many Internet firms, shows a net loss anyway-but such methods pump up the top line.

Fulfilment costs

Amazon.com, eToys, and 1-800-flowers are among the many e-commerce companies playing a shell game with "fulfillment costs," which are the expenses associated with warehousing, packaging, and shipping products. Offline companies usually record the expense on their income statements as a cost of sales. But not dot-coms. A lot of them classify fulfillment costs as a "marketing expense".

Why? Because cost of sales cuts directly into a company's gross profit margin. Many e-commerce companies already operate with extremely narrow margins and have little interest in seeing them trimmed further. The other benefit: The practise enables dot-coms to hide operational expences amid the huge marketing costs that investors believe are a temporary splurge associated with establishing brand recognition. If investors realized that these "marketing" numbers concealed large portions of the bussiness' permanent cost structure, they might change their opinion about the company's prospects. Textbook e-tailer Varsity-books.com went so far as to dismiss auditor KPMG in October when it objected to lumping fulfillment costs under marketing expenses. The company's new auditor PricewaterhouseCoopers, approved the practice.

Auction accounting

Auction houses, both real and virtual, make money by charging "listings fees" to those putting items up for bid. They also take a percentage of the price when an item is sold. The GAAP rules say auction houses should realize listing revenue over the whole period that an item is on the block. Instead the SEC says many online auction sites are recognizing all the revenue immediately. Similarly, transaction fees are supposed to be recognized only when a deal has been completed and the goods have been shipped. But according to the SEC some auction sites (many of which don't even control the delivery of goods between seller and buyer) recognize transaction revenue immediately. The best known of the group, eBay, does not specify in its filings exactly when it recognizes revenue. Its executives, on the advice of company lawyers, refused to fully explain their revenue recognition policy to FORTUNE.