Case 1: Financial reporting and Investment Decisions

In 20X1, during their first year of operations, two similar companies in the home heating industry—Glenwood Heating, Inc. All ratios and their calculations can be found in APPENDIX 2: Financial Ratio Calculations for Glenwood Heating, Inc.

RETURN ON NET OPERATING ASSETS

In general, what types of items does Molson Coors include in this line item?
Explain why the company reports these on a separate line item rather than including them with another expense item. Molson Coors classifies
What is the amount of comprehensive income in 2013? How does this amount compare to net income in 2013?
What accounts for the difference between net income and comprehensive income in 2013? In your own words, how are the items

The first step in thinking about continuing cash flows for Molson Coors Brewing Company is to classify income statement items as recurring or nonrecurring and operating or nonoperating. Once the continuing tax rate is estimated, the income statement of estimated continuing income for Molson Coors Brewing Company can be constructed as seen in Figure 2-C.

STATEMENT OF CASH FLOWS

Profitability can be assessed and analyzed once the statement of cash flows is presented and understood. The financing section of the statement of cash flows deals with balance sheet items used to finance the company.

ACCOUNTS RECEIVABLE

The allowance for bad and doubtful accounts estimates the amount of sales receivables that will not be collected because a customer does not pay. Below in Figure 4-A, Pearson's T-account for the allowance for bad and doubtful accounts for 2009 is shown.

U.S. GAAP

What are the key changes affecting GAC this year?
What are the big events to account for in 2014?
What is the revenue principle? At what point does GAAP indicate revenue should be recognized?
When does GAC report its revenue from custom orders? Under what circumstances would this be appropriate?
What alternative point in time exists for reporting revenue from custom orders?
What method do you think is best for recognizing revenue from custom shirts?
How would changing to this alternative method affect GAC’s financial statements? How would changing to this alternative method affect GAC’s
At what value does GAAP require accounts receivable to be reported?
What method of accounting for bad debts does GAC use? When is this method okay?
Has anything changed this year to suggest this approach is no longer acceptable? What do you learn from the number of days to collect receivables
What alternative method could GAC use for bad debts? Does any evidence suggest it is better?
What method of accounting for bad debts do you think GAC should use?
When does GAC report sales returns? Under what circumstances is that method acceptable?
Have circumstances surrounding returns changed in 2014? How?
What does GAAP recommend under these new circumstances?
Should GAC consider this alternative? Why? Are sales returns material to the key external user?
Which method of accounting for sales returns do you think is best?
Using what measurement does GAAP require inventory to be reported?
Using what measurement has GAC been reporting its inventory? When is this appropriate?
Has anything changed this year to suggest this approach is no longer acceptable? What do you learn from the number of days to sell inventory in
Is there any evidence to suggest that GAC will have to mark down its selling price below cost? What does the gross profit percentage in 2014 indicate about
What do you think GAC should do when reporting its inventory of graphic shirts?
How would changing to the alternative method affect GAC’s financial statements? How would changing to this alternative method affect GAC’s
If all the proposed changes were made, how would GAC’s current ratio change?
How much additional equity would Nicki need to contribute to return GAC to a current ratio of 1.0?

In addition, the GAC inventory balance will increase for the returned inventory, but will increase for the cost of the inventory. For more information on GAC policies, GAAP policies, and reconciling the two, see the case questions in the appendix. Lower receivables and higher unearned revenue would cause GAC's current ratio to fall.

Net present value helps report GAC receivables at the amount expected to be collected. The write-down method would reduce GAC's accounts receivable by $3,000, reducing its current ratio. This change would decrease GAC's current ratio because the change in accounts receivable would decrease current assets by $15,000 of the selling price of the expected returned inventory.

If these shirts are not sold at retailers, they are resold to discount stores at half GAC's original price.

DEPRECIATION

Since depreciation is an estimate, companies have some discretion as to how their company will estimate depreciation and the useful life of the asset. One example that shows the effect of different management decisions regarding the life used to calculate accumulated depreciation can be seen by looking at several different airlines and how each company depreciated a new Boeing 757. Assume that Northwest Airlines, Delta Airlines, and United Airlines purchased an all new Boeing 757 on January 1, 2005 for $75 million.

Northwest estimates that the Boeing 757 has a lifespan of between four and 25 years, Delta estimates a lifespan of between 15 and 25 years, and United uses a lifespan of 25 to 30 years. To simplify the calculations, each aircraft is assumed to have an average life, so for each company, depreciation will be calculated using the midpoint of the company's useful life range. For example, perhaps Northwest was using its Boeing 757 for long international flights, which wore out the plane more quickly, so it estimated the plane's life to be lower.

On the other hand, perhaps United used its Boeing 757 for flights between Jackson, Mississippi and Houston, Texas, so it estimated a longer life.

GARBAGE

As a result of Arthur Andersen's purposeful endorsement of Waste Management's incorrect financial statements, Arthur Andersen sued for a civil injunction. In addition, three of the four partners involved faced anti-fraud orders (the first in 20 years at the time), and one faced accusations of improper professional conduct. Neither Arthur Andersen nor any of the partners involved ever confirmed or denied the charges, but the firm and the three partners facing fraud charges all accepted the charges and paid cash payments.

CONTINGENCY FORMATTING

However, at the time of bankruptcy, Construct was still unable to reasonably estimate the costs or occurrence of any potential loss. Under GAAP, however, the probability of a contingent liability occurring would most likely be considered reasonably probable, but not yet probable. Although Construct could not reasonably estimate the costs of completing the remediation at the time, it was able to estimate the legal costs of the remediation and the costs of the investigation.

Therefore, an accrued liability should have been recorded in 2010 under GAAP and IFRS in the amount of $400,000, the total of legal costs and RI/FS. In 2011, the RI/FS was completed and the total cost of the remediation plan was estimated and submitted to EPA. Because the likelihood of the repair plan occurring was probable, the likelihood of the contingent liability was also probable.

In addition to classification based on the probability of their occurrence, contingencies can also be classified as profit or loss contingencies.

LONG-TERM DEBTS

Rite Aid's credit rating can be approximated using various analysis ratios that relate to long-term debt. Additionally, Rite Aid is not earning the amount of interest it owes in the current period. Prepare the journal entry Rite Aid should have made when these notes were issued.

Determine the total amount of interest expense recorded by Rite Aid on these notes for the year ended February 27, 2010. Prepare the journal entry Rite Aid should have made when the notes were issued. Assume that Rite Aid uses the effective interest method to account for this debt.

Under this method, does Rite Aid report the same interest rate on these notes each year?.

COMMON STOCK

Many of the various issues involved in stocks—such as why a company pays dividends or buys its own stock and the difference between authorized, issued, and outstanding stock—are covered in the appendix to this case. The supplement to this case presents an in-depth analysis of the common stock and dividends of both Merck & Co., Inc. and GlaxoSmithKline plc. The share capital account contains the capital amount that covers the nominal value of the outstanding shares.

The share premium account contains all paid-up capital over the par value of outstanding shares. The stockholders' equity account is the equivalent of Merck's common stock account, and the stock premium account is the equivalent of Merck's other paid-in capital account. Under this method, treasury shares are also deducted from the amount of equity instead of being deducted from common shares. ii) Refer to note 11 of Merck's financial statements.

Furthermore, GlaxoSmithKline's dividend payout is less than fifty percent, while Merck's is just over 100 percent.

INVESTMENTS

Available-for-sale securities are securities held indefinitely. If the market value of available-for-sale securities increased by $1 during the reporting period, what journal entry would the company record. What is the amount of net unrealized gains or losses on the available-for-sale securities held by State Street on December 31, 2012.

What was the amount of net realized gains (losses) on the sale of available-for-sale securities for 2012. Show the journal entry (in millions) that State Street made to record the sale of available-for-sale securities for the year 2012. Show the journal entry that State Street would make to mark the available-for-sale securities portfolio to market value at the end of the year.

This amount and the entry to mark the securities portfolio available for sale at market value will affect the investment section of the cash flow statement.

Revenue Recognition

Using the data provided in Table 1, prepare common size income statements using revenues and cost-of-goods-sold in the original S-1 and amended S-1
In the months leading up to Groupon’s IPO, the SEC posed a number of questions regarding Groupon’s choice of accounting principles for revenue
Groupon had recognized revenue for the sale of high-ticket items in late 2011
Groupon’s restatement of 2011 fourth-quarter financials resulted in a reduction of $14.3 million of revenues and a decrease of $30 million of

Some of the biggest risks facing Amazon and Wal-Mart include market fluctuations, changes in consumer preferences, and competition from other companies. In the long run, income and income growth will be more important because income is a more accurate picture of the actual amount of profit that the company will need to use to pay dividends and invest. The gross method that Groupon previously used reported revenue for the total amount of coupons sold.

It reported revenue equal to the full amount of the vouchers, instead of only recording the amount Groupon would have received in commission. Groupon said it should have been able to recognize the revenue because it was the primary player in the customer contract and bore more of the risk of the transaction than the company whose coupon was sold. Groupon's argument that it was the principal was a weak argument because, despite having the Groupon Promise and claiming to bear much of the credit risk on the transactions, Groupon never actually touched or delivered any of the products for which it sold vouchers.

Responsibility for performance or delivery is one of the key factors in determining when revenue should be recognized, so it does not appear that Groupon was entitled to the revenue it recognized under the gross method because Groupon had no responsibility for performance or delivery goods covered by its coupons.

DEFERRED INCOME TAXES

However, deferred tax assets or liabilities arise only if the difference between book income and taxable income is temporary. A deferred tax asset is a balance sheet account used to offset the deferred tax asset account. Use the information in the third table in Note 8 to parse the amount of “net deferred income taxes” recorded in the income tax journal.

The net effect of these two entries results in “net deferred income tax” liability of approximately $8,293,000. The costs that are subsequently deducted according to the tax method result in future tax deductions that lead to the deferred tax asset. Tip: When income tax rates change, companies should "remeasure" their deferred tax assets and liabilities.

To adjust for a change in the tax rate, ZAGG must reassess the receivables and liabilities for deferred income tax by seeing the effect of the change in the tax rate on the difference in book value and tax value.

RETIREMENT OBLIGATIONS

In addition, retirement benefits are based on the employee's compensation level and years of service with the company, while other benefits are not a function of this. f) Consider Johnson & Johnson's pension costs as described on page 61 of the company's annual report. Projected benefit obligation-service cost 597 Projected benefit obligation-interest cost 656 g) Consider Johnson & Johnson's pension plan liability, that is, the pension. liability, as described on page 62 of the company's annual report. . i. What influence do the benefits paid have on the pension obligation and pension investments?

The assets therefore no longer belong to Johnson & Johnson, nor the obligation to pay benefits. h) Consider Johnson & Johnson's pension plan assets, that is, the pension plan assets, as described on page 62 of the company's annual report. What is the December 31, 2007 value of the pension plan assets held by Johnson & Johnson's pension plan. The value of Johnson & Johnson's pension plan assets at year-end is $10,469 million.

This is the fair value of the current investments and contributions that Johnson & Johnson has available to use to pay for the benefits of its retirement plan.