Inventory Case

JMI Industries (“JMI” or “the Company”), a publicly traded company, manufactures and sells coaxial and fiber optical cable. JMI is contemplating two separate transactions for which it is evaluating the appropriate inventory and revenue recognition.

Transaction 1: BigWire, a customer of JMI,has entered into a binding written agreement to purchase 1,000 feet of fiber optic cable for $3.00 per foot. Because BigWire is constructing a new warehouse, it is unable to take delivery of the cable and has requested in writing that JMI store the cable in its warehouse until construction of BigWire's warehouse is completed. BigWire's warehouse will be completed three months from the time of purchase, at which time BigWire is required to take delivery of the cable. JMI stores fiber optic cable in 10,000-foot spools (spools of cable are considered finished goods and ready for shipment). JMI will not physically segregate the cable that BigWire will purchase; rather, the Company will designate the quantity in its inventory tracking system as "sold," thereby preventing the use of the cable to fulfill other customer orders. In other words, JMI will "virtually" segregate the inventory.

JMI and its auditors have concluded the following with respect to the arrangement with BigWire:

• Risks of ownership of the cable have passed to BigWire.

• BigWire has a substantial business purpose for requesting JMI to hold the cable at its warehouse (waiting on completion of the warehouse).

• JMI does not have additional performance obligations with respect to the cable purchased by BigWire.

JMI has concluded that it is appropriate to recognize revenue for Transaction 1 before the date on which BigWire takes delivery of the 1,000 feet of 18 AWG coaxial cable.

Transaction 2: Grant Telecom, a customer of JMI, entered into a binding written agreement to purchase 1,500 feet of fiber optic cable for $2.95 per foot. Grant Telecom's shipping terms are freight on board (FOB) shipping point, and JMI collected payment before the order shipped. Title transfers upon delivery to the carrier, and Grant Telecom will insure the product while it is in transit. Instead of using a third-party shipper (e.g., FedEx, UPS), JMI has elected to use its own logistics subsidiary, JMI Transit, to deliver the cable to Grant Telecom (JMI Industries owns 100 percent of JMI Transit). JMI Transit provides an array of shipping services to third-party customers outside the cable industry. Only 2 percent of JMI Transit's shipping revenue is expected to be derived from transactions with JMI in the current year.

Required:

Transaction 1

• Is it appropriate for JMI to recognize revenue before the date on which BigWire takes delivery of the 1,000 feet of 18 AWG coaxial cable? ( take a look at ASC 606-10-55-83)

• If JMI and BigWire’s fiscal years end after the agreement is signed but before the cable is delivered, on whose balance sheet should the cable be shown?

Transaction 2

• Is it appropriate for JMI to recognize revenue upon transfer of the inventory to the carrier?

• Would your answer change if 80% of JMI Transit’s shipping revenue came from transactions with JMI?

You should use the GAAP Codification database to answer these questions (and no other sources should be needed). To access the GAAP codification database, go to aaahq.org/FASB-GASB, and use the following access credentials:

Username:         AAA52009

Password:           7S8FrRw

Cite the section number of any relevant sections of the codification in your answer. Treat this assignment as though it were a research request in a professional setting.

Trillium Construction Company is a publicly traded company that began a long-term government contract on July 1, 2019 to build a housing complex for the price of $8,000,000. The construction was expected to take 24 months to complete.

a.       For the year ended December 31, 2019, Trillium incurred construction costs of $1,300,000 and it was estimated that an additional $3,900,000 in costs would needed to complete the contract. Trillium billed the government $2,000,000 during the first year and collected $1,000,000 by December 31, 2019. Trillium uses the percentage-of-completion method of revenue recognition. Calculate the gross profit to be recognized for the year ended December 31, 2019.

b.       Then, for the year ended December 31, 2020, Trillium incurred construction costs of $3,180,000 and at that point, it was estimated that an additional $1,120,000 in costs would be needed to complete the contract. Trillium billed the government $4,000,000 during the second year and collected $4,500,000 by December 31, 2020. Continuing to use the percentage-of-completion method of revenue recognition, calculate the revenue recognized for the year ended December 31, 2020.

c.       The CEO of Trillium has heard that the completed-contract method is easier to use than the percentage-of-completed method.   Briefly explain to the CEO (approximately 1 or 2 sentences) why Trillium should or should not adopt the completed contract method.

NETFLIX

(i) Estimate the stock beta for a company. Select a publicly traded company (preferably large firms) and download the monthly closing prices for 5 years into Excel. Choose a market index (e.g. S&P 500) and download the monthly closing values for 5 years into Excel. Calculate the monthly returns for the selected company and the market index. Using the regression function in Excel, regress the stock return on the market index return.

(ii) Compare and contrast the stock beta you estimated with two other sources (e.g. Yahoo! Finance, CNBC, etc.).

Please choose a publicly traded company to work on. You may select a company whose securities are traded on the NYSE, AMEX or NASDAQ. Please do not select a company that is a financial institution or services company. The company should sell merchandise.

Part I

1. Fill in some basic information about your company.

Name of company ______________________________________

Principal exchange where the company trades _______________

Market price of the stock ________________ as of _____________ (date)

Annual dividend ________________________________________

Last dividend paid on ____________________________________

2. Read the business summaries and management’s discussion and analysis (MD&A). Summarize the remarks (ex. Poor operating results/expansion plans/sale of a division, etc.)

3. What kinds of products and/or services does the corporation provide/sell?

4. a.         Which accounting/auditing firm audited the financial statements?
   2. Did the auditor’s report indicate any problems or exceptions?

5.         a.         Did you find any new terms within the financial statements?

b.         Did you find the presentation of the financial statements clear? Why or why not?

Part II

Indicate the formula to be used and insert the amounts used in computing each ratio. Express your answer in suitable units (percentages, decimals etc.)

1. Current ratio

2. Quick ratio

3. Receivable turnover

4. Average days sales uncollected

5. Inventory turnover

6. Profit margin

7. Return on assets

8. Return on Equity

1. Earnings per share

10. Debt to equity ratio

11. Dividend yield

12. Price earnings ratio (use price from question 1 and EPS from question 6-i)

Consider the following companies. Juventus F.C. S.p.A. is an Italian publicly listed football club. The club’s primary sources of revenue are: a Season and single ticket sales. b Television, radio, and media rights. c Sponsorship and advertising contracts. d The disposal of players’ registration rights. Players’ registration rights are recognized on the balance sheet at cost and amortized over the players’ contract terms. The club owns its stadium (“Juventus Stadium”), which opened in 2011, but leases the land adjacent to its stadium from the City of Turin under an operating lease arrangement. The operating lease has a term of 99 years and involves a lease payment, made in advance, of close to €12.8 million. To help finance the €105 million construction cost of the stadium, Juventus entered into an agreement with a large sports marketing agency, selling the exclusive naming rights for the new stadium for a period of 12 years. In exchange for the naming rights, Juventus received an advance payment of €38.5 million. Spyker Cars N.V. is a small Netherlands-based designer and manufacturer of exclusive sports cars, which had its initial public offering (IPO) in 2004 but delisted from the Amsterdam Stock Exchange in 2013. During the first five years as a publicly listed company, Spyker’s annual reve- nues ranged from €6.6 million (in 2009) to €19.7 million (in 2006). In these years, Spyker produced 242 new cars (including demonstration cars) and sold 194 cars. At the end of 2009, it held 28 cars in stock. Further, in 2009 the company spent close to €9.8 million on development, which it added to its development asset of €27.3 million, and €14,000 on research. Because Spyker had been loss-making since its IPO, the car manufacturer had €97 million in tax-deductible carry forward losses at the end of 2009. J. Sainsbury plc is a UK-based publicly listed retailer that operates 597 supermarkets and 707 convenience stores and has an estimated 16.7 percent market share in the UK. During the period 2010–2013, the company’s operating profit margin remained steady around 3.2 percent; in 2014 the operating profit margin dropped to 2.8 percent. At the end of March 2015, the net book value of Sainsbury’s land and buildings was £6.9 billion. A part of the company’s supermarket properties was pledged as security for long-term borrowings. In 2014 Sainsbury had 161,000 employees (107,000 full-time equivalents); many of them participated in one of the retailer’s defined-benefit pension plans.

1 Identify the key accounting policies for each of these companies.

2 What are these companies’ primary areas of accounting flexibility? (Focus on the key accounting policies.)

Shares for Deloitte plc and PWC ltd have the following historical dividends and price data

Required:

(a) Calculate the realized rate of return (or holding period return) for each share in each year. Assume an equally weighted portfolio. What would the realized rate of return on the portfolio be in each year from 2001 through to 2006? What are the average returns for each share and for the portfolio?

(b) Calculate the standard deviation of returns for each share and for the portfolio.

(c) Based on the extent to which the portfolio has a lower risk than the shares held individually, would you assess that the correlation co-efficient between returns on the two shares is closer to 0.9, 0.0 or -0.9?

(d) If you added more shares at random to the portfolio, what is the most accurate statement of what would happen to σp?

σp would remain constant

σp would decline to somewhere in the vicinity of 15%, or

σp would decline to zero if enough shares were included

Suppose a random sample of 90 U.S. companies taken in 2005 showed that 52 offered high-deductible health insurance plans to their workers. A separate random sample of 110 firms taken in 2006 showed that 52 offered high-deductible health insurance plans to their workers. Based on the sample results, can you conclude that there is a lower proportion of U.S. companies offering high-deductible health insurance plans to their workers in 2006 than in 2005? Conduct your hypothesis test at a 0.05 significance level. a. State the null and alternate hypotheses

H0:________________________________________________________________

H1:________________________________________________________________

b. What is the level of significance? b.

c. What is the value of the test statistic? c.

d. Compute the p-value d.

e. What is your decision regarding the null hypothesis? Interpret the result.

__________________________________________________________________________________

__________________________________________________________________________________

Options in Corporate Financing

Company B is a small, publicly traded technology company.  Company B is close to completing development of a new software/hardware product for schools that uses voice recognition to quickly translate a lecture into written notes that are projected onto a screen and automatically sent to students as PDF documents.  The lecturer can then annotate the notes with a drawing pad linked to the computer projection system.  These annotations are included in the PDF that is distributed after the lecture is complete.  

      The company needs about $30 million to complete development and begin production and marketing of this product.  The company is profitable with one other product that generates about $1,200,000 in cash flow annually.  For many reasons the company has been very secretive about its new product so its stock price is quite low, being based on the modest cash flows of its existing product.  Company officials and outside consultants agree that it is too early to reveal the new product’s details given what they know of competing products.

      The company has hired an investment banker to help it determine how to raise the $30 million.  The banker immediately recommends convertible bonds.  Current interest rates on bonds or notes for companies of this type are in the range of 8% to 10%, but convertible debt would probably have a coupon rate of 3% to 5% depending on the conversion price.  The higher the conversion price the higher the coupon rate.  

The banker says that convertible bonds are a win-win for the company in this situation.  The company can keep their product secret but issue stock at a higher price (the conversion price) than the current stock price.  In the meantime, the interest rate on the debt will be about 4% or 5%, which the company should be able to support from its cash flow.  The banker explains that if for some reason the product is not a success, and there is no conversion to stock, the company has issued debt at a very low rate. Probably 5% below the rate on non-convertible debt.  Win-win!

The company’s tax rate is about 28%.

1. Can the company afford the interest on $30 million of convertible debt?
2. Is the banker correct about this being a win-win situation for the company?  Is there a different perspective that company managers need to understand before making this decision?  Explain.
3. If convertible debt has a lower coupon rate because the conversion option has value.  Why don’t all companies issue convertible debt and save on interest costs?

Umbrella Corporation sold 700 tractors on January 1, 2006. Umbrella paid $80,000 and $60,000, respectively, during 2006 and 2007 servicing the 3-year warranties that accompany the tractors. The warranties are not an integral part of the sale. Of the total revenues of $4.5 million derived from tractor sales, $450,000 were attributable to the sale of warranties.                  
Umbrella estimated the total cost of servicing the 3-year warranties to be $320,000 as of December 31, 2006 and revised that estimate to $140,000 on December 31, 2007. Umbrella records warranty revenue prorata over the term of servicing the warranties.                  
What is the balance of unearned warranty revenue as of December 31, 2007?                  

3-30 Publicly traded companies must electronically file a variety of forms or reports with the SEC, including the Form 10-K, which includes the audited annual financial statements. The SEC makes most of these electronic documents available on the Internet via EDGAR, which stands for Electronic Data Gathering, Analysis, and Retrieval system. The primary purpose for EDGAR is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the agency.

b. Visit the PCAOB’s website (www.pcaob.org) and use the link to “Auditing” under the heading for “Standards” to locate the PCAOB’s Auditing Standards. Search the links to the Auditing Standards to answer the following questions:

1. Where would the auditor locate guidance about changes to the auditor’s report if Facebook makes a change in accounting principle that is considered material? Identify the appropriate section in the Auditing Standards and identify the relevant paragraph(s) within that section that would be applicable to this situation. Assume that Facebook properly reports the change in the financial statements.

2. Where would the auditor locate guidance to determine the effect on the auditor’s report if he or she has substantial doubt about Facebook’s ability to continue as a going concern? Identify the appropriate section and the relevant paragraph(s) within that section that would be applicable to this situation.

3. Facebook’s Form 10-K contains information that is in addition to the financial statements and related footnotes. Where would the auditor locate guidance that addresses his or her responsibility for this other information and what is the auditor’s obligation related to that information? Identify the appropriate section and the relevant paragraph(s) within that section that would be applicable to this situation.