Briggs and Stratton is experiencing significant pressure from its customers to maintain and reduce costs. Therefore, increases in costs of goods sold without increases in sales prices reduce net income and profit margins. In using accounting policies to reduce costs of goods sold, Briggs and Stratton can better maintain its net income and profit margins. .
For a manufacturing company, product quality is also an important success factor. Briggs and Stratton estimates warranty costs and accounts for those costs as a liability on the balance sheet (Briggs and Stratton, 2002). However, I find it odd that sales increase 15% in 2002 and the warranty liability account actually decreased. I doubt Briggs and Stratton has made adequate revenue adjustments to cover the increased warranty claims. As a result, Briggs and Stratton is most likely inflating its revenue and in turn its net income and earnings per share. .
In addition to inventory management and quality, revenue generation is also a key success factor for Briggs and Stratton. Briggs and Stratton recognizes revenue when goods are shipped (Briggs and Stratton, 2002). This is the standard for the industry. Like Briggs and Stratton, Tecumseh also recognizes revenue at the time of shipment (Tecumseh, 2002). Since there will undoubtedly be returns, warranty claims, and bad accounts, Briggs and Stratton will not collect full value for all the products it ships. Briggs and Stratton does deduct reserves for bad debt and returns (Briggs and Stratton, 2002). Briggs and Stratton has not seen an increase in its accounts receivable turnover (Zacks, 2002). .
In most business, it is critical to maintain a high credit rating so that the company can access inexpensive debt financing. Debt financing is used to lower overall cost of capital, which increases a company's return on stockholders equity. In order to maintain a good credit rating, a company needs to have sufficient cash flow to repay interest and principal on a loan.