Notes Explanatory and Other Financial Information SOLUTIONS: E10-1. Class discussion can focus on the importance of these items to a reader's full understanding of the company's financial statements (financial position, results of operations, and cash flows). E10-2. Note especially the acceptance of responsibility for the financial statements, and the statement about the company's system of internal control. E10-3. The auditors' opinion is that the identified financial statements present fairly, in all material respects (emphasis added), the financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Thus, the auditor does guarantee that the statements are free of immaterial errors (only that they are free of material errors) or that the statements present the financial position, results of operations, and cash flows perfectly (only that they present the statements fairly). E10-4. The standard three-paragraph independent auditors' report is not at all an indicator of a company's future financial success or future cash dividends. However, if the auditor has substantial doubt about an entity's ability to continue as a going concern, there will be an explanatory paragraph to that effect. E10-5. a. Original earnings per share is $3.12. To reflect a 3 for 1 stock split, divide by 3. Adjusted EPS = $1.04 b. For 2002, 2000 earnings per share as adjusted in 2001 will have to be adjusted again by dividing by 2. Adjusted EPS for 2000, to be reported in 2002 = $1.04 / 2 = $0.52 c. To reflect a 10% stock dividend, divide unadjusted earnings per share by 1.10. Adjusted EPS = $3.12 / 1.10 = $2.84 E10-6. a. Net income for 2001 = $925,980. Stock dividends and stock splits do not cause changes to reporting earnings amounts. b. Earnings per share = Net income / Weighted average number of shares outstanding = $925,980 / 268,400 = $3.45 c. For the calculation in 2002 the weighted average number of shares outstanding in 2001 must reflect the 3 for 1 stock split in 2002. EPS = Net income / Weighted average number of shares outstanding = $925,980 / (268,400 * 3) = $1.15 E10-7. Earnings per share, as restated..................................................................... $0.60 Multiply by 2 to reflect 2 for 1 stock split.................................................... $1.20 Multiply by 1.05 to reflect 5% stock dividend.............................................. $1.26
Chapter 10 Proof: Original earnings per share............................................................... Adjust for stock split (divide by 2)................................................................ Adjust for 5% stock dividend (divide by 1.05)............................................. E10-8. a. Earning per share for 2000: As reported in 2002.................................................................................. As reported in 2001 ($0.90 * 1.1) ............................................................... As reported in 2000 ($0.99 * 1.1) ............................................................... $1.26 $0.63 $0.60
$0.90 $0.99 $1.09
The key here is to see that the $0.90 EPS figure has already been restated, so the task is to work backwards to determine the originally reported per share amount. b. Dividends per share for 2000: As reported in 2000................................................................................... As reported in 2001 ($0.40 / 1.1).................................................................. As reported in 2002 ($0.36 / 1.1).................................................................. $0.40 $0.36 $0.33
In this case, the originally reported amount per share is known, so the task is to make the restatements going forward. P10-9. a. Net revenues in 1992 = $5,844 million b. Gross profit in 1995 = $16,202 - $7,811 = $8,391 million c. Difference between operating income and net income in 1997 = $9,887 - $6,945 = $2,942 million d. Year(s) in which net income decreased as compared to the previous year = 1994, 1998
Potential obligation under put warrants = $130 million (table, p.20)
f. Amount of short-term debt = $230 million (table, p.20) Amount of long-term debt = $955 million (table, p.20) g. Total revenues from unaffiliated customers outside of the Unites States = $16,649 million (table, p.28, Total revenues $29,389 less U.S. $12,740) P10-9. h. Amount committed for the construction of property, plant, and equipment = Approximately $2.5 billion (p.27) i. Amount of available-for-sale securities classified as cash equivalents = $3,362 million (p. 21) j. Gross profit for the third quarter of 1999 = $7,328 - $3,026 = $4,302 million (table, p.37use September 25 column)
Explanatory Notes and Other Financial Information k. Amount of interest income earned = $618 million (table, p.23) P10-10. a. Percentage of R&D relative to net revenues in 1999 = $3,111 / $29,389 = 10.6% b. Amount by which property, plant and equipment decreased during 1999 (i.e., for depreciation, asset sales, and similar transactions) = Net investment in property, plant & equipment, 1998............. Additions to property, plant & equipment, 1999...................... Less: Decreases in property, plant & equipment, 1999.......... (?) Net investment property, in plant & equipment, 1999............. $11,609 3,403 $11,715 million
Solving for the missing amount, 1999 decreases = $3,297 million c. Year in which stockholders equity grew by the greatest amount over the previous year = 1999, increased by $9,158 ($32,535 - $23,377).
Change in total liabilities from 1993 to 1999 = $4,920 increase, as computed below: Total assets........................................... Stockholders equity............................ Total liabilities. ..................................... 1999 $43,849 32,535 $11,314 1993 $11,344 7,500 $ 3,844 Change +$32,505 + 25,035 +$ 7,470
e. Amount of work-in-process inventory = $755 million (table, p.19) f. Amount of interest expense capitalized as a component of construction costs = $5 million for 1999 (p.19) g. Amount of revenues earned in Europe = $7,798 million (table, p.28) h. The companys effective tax rate = 34.9% (table, p.23) P10-10. i. Cost and estimated fair value of investments held in corporate bonds = Cost = $865 million, Estimated fair value = $905 million (table, p.21) Market price range of common stock for the fourth quarter of 1999 = High = $83.13, Low = $65.13 (table, p.37)
k. Amount of current and deferred taxes incurred from foreign operations = Current = $384 million, Deferred = $(57) million (table, p.23) P10-11. a.- e. Answers vary depending on the company analyzed. P10-12. a.- e. Answers vary depending on the company analyzed.
Chapter 10 C10-13. a. The Corporate column represents the cost of central administration (i.e., headquarters) of the company, and includes those assets and expenses that cannot be easily identified with any of the business segments. Note to instructors: The terms cost center and profit center are not discussed until Chapter 12, but can be introduced here. b. Significant trends in consolidated totals: Operating income (loss) improved dramatically each year. Identifiable assets decreased significantly each year. Depreciation and amortization decreased significantly each year. Capital expenditures dropped off significantly during 1999. Notable trends in specific business segments:
Net revenues declined rapidly in both the CT and DSS segments, but seem to be rising in the DSIM segment. Identifiable assets have followed the same pattern as noted above for revenues Assets declined for the CT and DSS segments, but seem to be rising in the DSIM segment. Capital expenditures have dropped off significantly for the CT segment, but seem to be increasing for the DSIM segment. Significant amounts are shown for all items in the Corporate column for 1997 and 1998 but not for 1999. (Possible explanations for this trend are offered in part e).
C10-13. c.
Imation (3M) Corp. 1999 ROI by Business Segment (Dollar amounts in millions) Data Storage and Information Management $952.1 31.9 460.6 367.7 414.2 3.4% 2.3 7.7% Color Technologies $339.8 37.8 147.4 174.0 160.7 11.1% 2.1 23.5%
Net revenues.......................................................... Operating income................................................... Identifiable assets, 1999......................................... Identifiable assets, 1998......................................... Average identifiable assets. .................................... Margin................................................................... Turnover..................................................................... ROI ........................................................................
d. ROI for 1999 is definitely up relative to 1998 for the Color Techniques segment because:
Explanatory Notes and Other Financial Information
the dollar amount in the numerator of the ROI calculation (operating income) was higher in 1999 than in 1998, and the dollar amount in the denominator (average identifiable assets) was lower in 1999 than in 1998.
e. The most likely explanation for this phenomenon is that Imation (3M) Corp. has discontinued certain business operations during 1999, resulting in the elimination of one or more previously reportable business segments. As a result, significant amounts of depreciation expense and capital expenditures from prior years (1997 and 1998 in this case) must now be classified under the Corporate column. Similar patterns can be seen in the net revenues, operating income (loss), and identifiable assets amounts shown in the Corporate column. Notice, for example, that more than $1 billion of identifiable assets are assigned to the Corporate column for 1997, but only $716 million for 1998 and $472 million for 1999. This pattern suggests that the discontinued operations were phased out slowly. By the end of 1999, only the true corporate assets that remain (after the phase out period was completed) are reported in the Corporate column. f. To the extent that past performance may be indicative of future prospects, the Color Technologies segment appears to offer the greatest potential for high returns in the future. The DSS segment has been a breakeven operation at best, although the asset investment has remained comparatively small. The DSIM segment seems to require heavy asset investments relative to Color Technologies; likewise, the DSIM margins have been much smaller than those generated in Color Technologies.