Accounting and Finance Solving Problems Solutions P4-5: Microsoft Statements of Cash Flow 1999-2001

The Microsoft Corporation uses the indirect method to prepare the statement of the cash flow. The cash flow by operating activities is prepared by reconciling from the net income to the net cash. As being revealed in the Microsoft statement of cash flow, the net income, depreciation, amortization, account receivables and others are used to arrive at the net cash. In the cash flow statements, the depreciation and amortization are added to the net income based on its accrual basis.

The Microsoft added the unearned revenue to the net income because the company has already received money for the product and services not yet fulfilled. As a result, the company has the legal obligation to supply these good and services to the purchaser. In other words, the unearned revenue is an equivalent of the net revenue that the Microsoft will fully earn if the company has fulfilled its legal obligation to the purchaser. On the other hand, a recognition of unearned revenue is deducted from the net income because these goods have not yet been delivered. This revenue was recorded as liability because the Microsoft has not delivered the products to buyers.

c. The net income is the first item that would be viewed positively by creditors and investors because the net income reveals the financial performance of a company at the end of the fiscal year. The net income can assist a company to prepare ROI (Return of Investment), ROA (Return of Asset) and net margins, which assist investors and creditors to understand the company financial performances. The preferred stock dividends are other items that creditors and investors will view positively because the dividends reveal the capacity of the company to increase or decrease the wealth of investors. The Microsoft statement of cash flow revealed that the company recorded negative preferred stock dividends at the end of the fiscal years of between 1999 and 2000.

d. The preferred stock dividends are the items that potential investors will view negatively because between 1999 and 2001, the company recorded negative financial record in this item.

e. The gains on investments are subtracted in the operating section because they increase the net income since the gains are not attributed to the operating activities in the business of an organization. On the other hand, losses on investments are added because they decreased the net income.

f. Increase in the account receivables makes the net income to be greater than the cash recorded because the account receivables increase the net income. However, since no cash is received, the cash recorded by the company will be lower than the net income. As being revealed in the Microsoft cash flow statement, unearned revenues are added, and account receivable are deducted. Net recognitions are deducted making the value of cash and net income to be different.

g. "Exchange of common stock for land" will appear on the investing activity in the Microsoft cash flow statement. However, the interest paid will appear in the company operating activities.

f. The item was added back in 2001's net income because of the adoption of new rule on 1 July 2000 representing SFAS No .133, which required companies to implement cumulative pretax reduction . Typically, the element represents the effects on the Microsoft net income, a change in the accounting principles and net income tax that have occurred during the accounting period, which required to be adjusted in the accounting year. For example, the Microsoft added this item to follow the FASB new accounting rules and standards. In essence, the FASB mandated the Microsoft to use the cumulative effect in its accounting to abide to the new accounting rule.

P4-6: Tommy Hilfiger Microsoft Statements of Cash Flow 2000-2001

D. Tommy Hilfiger overestimated its restructuring costs to control costs of operation in the future. Moreover, the costs restructuring denotes aggressive application of GAAP rules. The restructuring costs would also make the company to move its future expenses in the next year result.

P5-10:

a. The improper accounting records will lower the Leslie Fay current asset, which will reduce the overall total assets. Failure to properly record the returns will lead to the misinterpretation of the company net income or misleading net income figure. The error will make the company to increase the costs of operations and lower the overall net income. The error would also make the company to record a lower ROA (return on assets), ROE (return on equity) and net profit margin in the fiscal year. Moreover, the improper accounting will lead to an incorrect valuation of the entire business of Leslie Fay. The error will make the company to lower the net cash in the operating activities in the cash flow statement for the fiscal year.

B. By holding the sales as well as the cost of goods sold,...

The effects of this fraud is that it will make the company inflating its revenue at the end of the fiscal years, which the company has not recorded in reality. Inflating the revenue will make the company recording revenue that has not recorded in the first year. Moreover, the fraud will increase the value of the company total assets, which the company has not actually recorded.
c. The effect of the fraud on the balance sheet and income statements in the following year is that the company will not be able to record the actual revenue and assets that it has posted in the next year. This issue will also increase the company liabilities. Moreover, the company has violated the financial fraud law because the balance sheet and income statements have not been properly recorded.

P5-11:

a. The change in the treatment will lower the current assets and the total assets of the Critical Assets. Moreover, the company will record higher total liabilities, which will lower the overall total assets of the Critical Assets.

b. The effect will increase the company total liabilities because the issue will make the company to apply for more loans, and unable to fulfill its current liabilities.

c. The effect on the Critical Path will make the prices of the equities to slump, which will reduce the value of the company equities. Moreover, the total equities of the company will be reduced because the investors will lose confidence in the stocks of the Critical Path.

P5-12: Garden Life Plan

The management Garden Life Plan will incur additional costs by allowing another audit company to audit its account. Thus, the management should not replace another audit company for Deloitte & Touche because the new company will take more time to understand the financial statements of the Garden Life, which will make the company to incur more cost of operations, consequently reduce the overall net profits. Thus, the management of the Garden Life should sort out the problem with the Deloitte and allow the company to audit its financial records.

C5.1. Amazon.com

a. The table 1 reveals the changes in the accounting between 1998 and 1999 fiscal year.

Table 1: Changes ($000)

1999

1998

Changes

Total Assets

$2,471,551

$648,460

$1,823,091

Total Current Liabilities

738,935

161,575

577,360

Long-term Debts & Other

1,466,338

348,140

1,118,198

Total Liabilities

$2,205,273

$509,715

$1,695,558

Total Shareholder Equity

$266,278

$138,745

$127,533

b. The net loss of $719, 968,000 will reflect in the total liabilities in the company balance sheet. The loss will make the company total liability to increase. Based on the net loss recorded, the company has recorded a change of $1.69 Billion in the total liabilities between 1998 and 1999 fiscal year. However, the T. account would still have credit balance because the total assets ($1.82 Billion) were greater than the total liabilities ($1.69 Billion).

c. The first reason was that Amazon had aggressively purchased new fixed assets between 1998 and 1999 worth more than $287 Million making the company to increase its total assets despite the loss. Additionally, Amazon has invested in marketing securities of more than $2.35 Billion within the 1999 fiscal year. Moreover, the company embarked on acquisition of new companies that worth more than $369 Million. Moreover, the company was able to manage its current asset effectively. Typically, Amazon was able to lower its total liabilities compared to its total assets. Between 1998 and 1999, Amazon had lowered its total liabilities making the total assets to increase despite its losses.

d. Interest payable is the interest expenses that already incurred, however, not yet being paid as at the date the balance is recorded. The table 2 presents the interest payable account for the Amazon Inc.

Table 2: Amazon Interest Payable Account ($)

1999

1998

Interest Payable

$24,888,000

$10,000

e. The increase in the interest payable is due to the increase in the long-term debt of Amazon in 1999. Amazon long-term debts were more than $1.46 Billion at the end of the 1999 fiscal year. Thus, the interest payable would increase in the 1999 because of the increase in the long-term debt. However, the interest payable decreased in 1998 because the company recorded a lower long-term debt during the fiscal year.

f. The insurance is the example of item that should be include in the prepaid expenses. The prepaid expenses is added as assets because this is the payments, which Amazon will receive…