in this particular case polaroid had a gain

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Unformatted text preview: ditional retailing industry. As a result analysts were trying to pick the future winners in this new industry channel. Since few of these companies are profitable analysts had to develop alternative measures to try and evaluate the relative and absolute performance of these companies. The specific effect that this FASB rule had on the income statements on companies like Amazon.com was to increase the cost of good sold and decrease the gross profit percentage. These companies lobbied against this change because these companies were promoting the idea that their gross profit percentages were much higher than traditional retailers. After this change it became very apparent that their cost structure was not a competitive advantage against traditional retailers. At that point their stock prices started to decline. c. There is no impact on the reported cash flows of these companies as a result of this accounting change. This change moves where these costs are reported on the income statement but has no impact on the physical operations of the company. d. Theoretically, the price of a company's stock equals the present value of the cash flows the stock market expects a stockholder in that company to realize from holding that stock. Thus, the stock price of these companies should not be impacted by this accounting change. While the cash flow of a company will not change as a result of this accounting change it does impact the expectations of investors as to the future cash flows of these companies. This change highlighted information in a way that reduced investors future estimates of the profitability or cash flow of these companies. ID13–6 a. Although it could be argued that lawsuits are a normal part of conducting business in the United States and that lawsuits may not be that infrequent, the settlement was probably disclosed as an extraordinary loss. The determining factor in each case would be if the event was infrequent and unusual, if the event is both of these then it should be reported as an extraordinary. Extraordinary items should be disclosed net of the associated tax effect. With a tax rate of 34% and a loss of $909.5 million, Kodak would receive a tax benefit of $309.23 million. Thus, Kodak should have reported a net loss of $600.27 million on its 1990 income statement for the settlement. b. The patent infringement case is an example of a contingency. SFAS No. 5, "Accounting for Contingencies" states that a contingency is "an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur." In this particular case, Polaroid had a gain contingency and Kodak had a loss contingency. Under the guidelines set forth in SFAS No. 5, the most that Polaroid could have done in its 1989 annual report was to disclose the lawsuit in a footnote. Alternatively, Kodak could have either disclosed nothing about the lawsuit, disclosed the lawsuit in a footnote, or recorded a loss and a...
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