Account Question

Problem 1.
Here are comparative balance sheets and an income statement:
December 31
2023 2022
Cash 730 450
Accounts Receivable 1700 1600
Inventory 800 750 Income Statement
Equipment (net) 2000 2100 for 2023
Total Assets 5230 4900 Sales 7100
COGS 2800
Wages 1700
Accounts Payable 740 710 Depreciation 1100
Long Term Debt 1900 1900 Selling and Admin 881
Interest 190
Capital Stock 1200 1200 Pretax Income 429
Retained Earning 1390 1090 Taxes 30% 129
SE 2590 2290 Income 300
Requirements:
1. Compute the following figures
a. Accounts Receivable Turnover
b. Days in Accounts Receivable
c. Inventory Turnover
d. Days in Inventory
e. Purchases
f. Accounts Payable Turnover
g. Days in Accounts Payable
h. Operating Cycle
i. Cash conversion days
j. Earnings Before Interest and Taxes
k. Return on Assets
l. Profit Margin
m. Asset Turnover
n. Return on Common Equity
2. Use the valuation model of Equation 7.6 to value the company above as of December 31, 2023. You’ll
need the (1) discount rate, (2) the forecasted earnings, and (3) a convenient method of finding the
present value of an annuity that stretches permanently into the future. The discount rate is 10 percent.
The forecasted earnings for 2024 is $320.
The Abnormal Earnings, Equation 7.7, that you identify for 2024 is the Abnormal Earnings that the
company will experience each year, permanently, in the future. The company does not pay dividends.
Suppose the Abnormal Earnings you arrive at for 2024 is $100. It’s not, but suppose it is. (3) The present
value of the permanent annuity of $100 of Abnormal Earnings is easily computed at the discount rate of
10 percent as $100/0.10 = $1,000. The present value of a permanent annuity of $100 at 10% is $1,000.
Problem 2.
Here is ROKU’s report of how they account for revenue.
ROKU
The Company sells the majority of its devices in the U.S. through retailers and distributors as well as through the
Company’s website. Devices revenue primarily consists of hardware, embedded software, and unspecified upgrades
and updates on a when and if-available basis. The hardware and embedded software are considered as one
performance obligation and revenue is recognized at a point in time when the control transfers to the customer.
Unspecified upgrades and updates are available to customers on a when-and-if available basis. The Company
records the allocated value of the unspecified upgrades and updates as deferred revenue and recognizes it as
devices revenue ratably on a time elapsed basis over the estimated economic life of the associated products.
Suppose a ROKU device sells for $50. Of that amount, the ‘unspecified upgrades and updates,’ are valued at about
$10. The ROKU device costs ROKU $30 to manufacture. Here is a balance sheet with a single ROKU device in
inventory that cost ROKU $30 to purchase from their manufacturing vendor:
Statement of Financial Position
Cash Liabilities $0
Inventory $30
Total Assets $30 Common stock $15
Retained earnings $15
Total Shareholders Equity $30
Required:
1. Provide the journal entry for the sale of the ROKU unit for cash. No upgrades or updates are performed for
the customer this period.
2. Provide the balance sheet after the sale of the ROKU unit.
3. Provide the income statement for the period of the sale of the ROKU unit.
4. In your text, Figure 6-1 describes GAAP accounting rules and management discretion. What discretion does
ROKU management have to increase or decrease income in the year the device is sold?
5. Suppose management intends to exercise their discretion. Within the financial reporting process, who is
responsible for limiting management?
Problem 3.
Here are two unrelated stems and requirements.
1. Problem statement 3-1
The table below suggests that some organizations do not have the same diligence in developing a system of
tracking how close they are to covenant thresholds compared to their diligence in control over financial reporting,
as required by SOX. It isn’t important for our purposes, but FCPA is the Foreign Corrupt Practices Act.
Requirement:
Speculate on why audit committees do not regularly ask about debt compliance. Feel free to speculate on any
factor that you wish, including that whether an audit committee asks varies with how financially distressed the
company is. Maybe the 28% who asked were financially distressed and had a reason to bring it up. Or, it might
important that debt covenants are sometime built on variations from GAAP, like the non-GAAP figure, Earnings
Before Interest, Taxes, and Depreciation and Amortization (EBITDA), and the audit committee is less concerned
about non-GAAP measures. Does that relieve them of responsibility for what management states as the non-GAAP
figure.
2. Problem statement 3-2
I saw that one company asked for a ‘relief period’ for a financial covenant. They stated this: The Credit Agreement
Amendment amends the Credit Agreement to, among other things, extend the financial covenant relief period (the
Financial Covenant Relief Period”) through April 1, 2022.
Requirement:
a. Why would a borrower ask for a ‘relief period?’
b. Would a lender ask for something in exchange for a ‘relief period?’ If so, would they ask for the same
concessions as though the covenant had been actually violated (or about to be violated)? Be certain to
consider the situation where a borrower will be a routine customer of the lender. That is, the borrower has
routinely borrowed and, presumably, repaid loans in the past and will probably continue to be a customer in
the future.