Here we see one of the benefits of a weaker U.S. dollar: it boosts the international sales numbers of U.S. companies! In Office Depot’s case, international sales were boosted by $253 million because the dollar weakened over the year. Why? A weaker dollar means more dollars are required to buy a foreign currency, but conversely, a foreign currency is translated into more dollars. So, even though a product may maintain its price in foreign currency terms, it will translate into a greater number of dollars as the dollar weakens.

We call this a technical factor because it is a double-edged sword: if the U.S. dollar strengthens, it will hurt international sales. Unless you are a currency expert and mean to bet on the direction of the dollar, you probably want to treat this as a random variable. The follow-up question to the currency factor is this: Does the company hedge its foreign currency? (Office Depot generally does not, so it is exposed to currency risk.)

Summary

Revenue recognition is a hot topic and the subject of much post-mortem analysis in the wake of multiple high-profile restatements. We don’t think you can directly guard against fraud; that is the job of a company’s auditor and the audit committee of the board of directors. But you can do the following:

• Determine the degree of accounting risk posed by the company’s business model.
• Compare growth in reported revenues to cash received from customers.
• Parse organic growth from the other sources, and be skeptical of any one-time revenue gains not tied directly to cash (quality of revenues). Scrutinize any material gains due to acquisitions. And finally, omit currency gains.

Taken From : Advanced Financial Statements Analysis

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