Financial
Reporting Problem
The Procter & Gamble Company (P&G)
The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.
Instructions
Refer to P&G’s financial statements and the accompanying notes to answer the following questions.
(a) What were P&G’s net sales for 2014?
(b) What was the percentage of increase or decrease in P&G’s net sales from 2013 to 2014? From 2012 to 2013? From 2012 to 2014?
(c) In its notes to the financial statements, what criteria does P&G use to recognize revenue?
(d) How does P&G account for trade promotions? Does the accounting conform to accrual accounting concepts? Explain.
Comparative Analysis Case
The Coca-Cola Company and PepsiCo, Inc.
The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies’ complete annual reports, including the notes to the financial statements, are available online.
Instructions
Use the companies’ financial information to answer the following questions.
(a) What were Coca-Cola’s and PepsiCo’s net revenues (sales) for the year 2014? Which company increased its revenue more (dollars and percentage) from 2013 to 2014?
(b) Are the revenue recognition policies of Coca-Cola and PepsiCo similar? Explain.
(c) In which foreign countries (geographic areas) did Coca-Cola and PepsiCo experience significant revenues in 2014?
Compare the amounts of foreign revenues to U.S. revenues for both Coca-Cola and PepsiCo.
Financial Statement Analysis Case
Westinghouse Electric Corporation
The following note appears in the “Summary of Significant Accounting Policies” section of the Annual Report of Westinghouse
Electric Corporation.
Note 1 (in part): Revenue Recognition. Sales are primarily recorded as products are shipped and services are rendered. The percentage-of- completion method of accounting is used for nuclear steam supply system orders with delivery schedules generally in excess of five years and for certain construction projects where this method of accounting is consistent with industry practice. WFSI revenues are generally recognized on the accrual method. When accounts become delinquent for more than two payment periods, usually 60 days, income is recognized only as payments are received. Such delinquent accounts for which no payments are received in the current month, and other accounts on which income is not being recognized because the receipt of either principal or interest is questionable, are classified as nonearning receivables.
Instructions
(a) Identify the revenue recognition methods used by Westinghouse Electric as discussed in its note on significant accounting policies.
(b) Under what conditions are the revenue recognition methods identified in the first paragraph of Westinghouse’s note above acceptable?
(c) From the information provided in the second paragraph of Westinghouse’s note, identify the type of operation being described and defend the acceptability of the revenue recognition method.
Accounting, Analysis, and Principles
Diversified Industries manufactures sump-pumps. Its most popular product is called the Super Soaker, which has a retail price of $1,200 and costs $540 to manufacture. It sells the Super Soaker on a standalone basis directly to businesses. Diversified also provides installation services for these commercial customers, who want an emergency pumping capability (with regular and back-up generator power) at their businesses. Diversified also distributes the Super Soaker through a consignment agreement with Menards. Income data for the first quarter of 2017 from operations other than the Super Soaker are as follows.
Revenues $9,500,000
Expenses 7,750,000
Diversified has the following information related to two Super Soaker revenue arrangements during the first quarter of 2017.
1. Diversified sells 30 Super Soakers to businesses in flood-prone areas for a total contract price of $54,600. In addition to the pumps, Diversified also provides installation (at a cost of $150 per pump). On a standalone basis, the fair value of this service is $200 per unit installed. The contract payment also includes a $10 per month service plan for the pumps for 3 years after installation (Diversified’s cost to provide this service is $7 per month). The Super Soakers are delivered and installed on March 1, 2017, and full payment is made to Diversified. Any discount is applied to the pump/installation bundle.
2. Diversified ships 300 Super Soakers to Menards on consignment. By March 31, 2017, Menards has sold two-thirds of the consigned merchandise at the listed price of $1,200 per unit. Menards notifies Diversified of the sales, retains a 5% commission, and remits the cash due Diversified.
Accounting
Determine Diversified Industries’ 2017 first-quarter net income. (Ignore taxes.)
Analysis
Determine free cash flow (see Chapter 5) for Diversified Industries for the first quarter of 2017. In the first quarter, Diversified had depreciation expense of $175,000 and a net increase in working capital (change in accounts receivable and accounts payable) of $250,000. In the first quarter, capital expenditures were $500,000; Diversified paid dividends of $120,000.
Principles
Explain how the five-step revenue recognition process, when applied to Diversified’s two revenue arrangements, reflects the concept of control in the definition of an asset and trade-offs between relevance and faithful representation.
