Kodak mini-case - Babson College



DuPont mini-case

(Review of financial statements)

The following case is designed to give you a review of financial statements. Most of these questions should be familiar to you from your introductory financial reporting course. Please take a minute to review the DuPont 10-K report (the link is in the week 1 materials). Now, using the DuPont 10-K and starting with the management report on page 58, please answer the following questions:

1) Management Responsibility and Independent Accountants report

a) Who has responsibility for preparation of the annual report?

b) What information is contained in the Responsibility for Financial Reporting?

c) What role do the independent accounting firms play?

d) Do auditors audit every transaction?

e) What kind of opinion does the independent auditing firm make?

f) Does the audit report provide investors with a guarantee that no fraud has occurred?

g) What certifications are required under Sarbanes-Oxley?

2) Income statement

a) How does DuPont recognize revenue?

b) Identify the cost-flow assumption that DuPont uses to value inventories. How has this cost-flow assumptions affected profits and cash flow for 2004 and cumulatively (note 13)?

c) Since goodwill is no longer amortized, why is DuPont reporting any amortization expense?

d) DuPont has a significant investment in R&D. How is the company accounting for these expenditures? How will price-to-book ratios of R&D intensive companies compare in general with others? The R&D issue is part of a broader issue relating to the accounting for knowledge assets. Can you think of any other examples where the type of accounting issue embodied by R&D accounting exists?

e) DuPont reports restructuring costs in each of the past 3 years. What are the general categories encompassed by this expenditure? To what accounting period(s) do they relate? How should these costs be treated in your forecasts? What does the negative amount in 2003 mean?

f) DuPont reports gains relating to the sale of interests by a subsidiary and to the sale of a subsidiary. What is the difference between the two? In general, how are gains (losses) computed?

g) Why is income tax expense greater than pre-tax income in 2003?

h) What is the difference between basic and diluted earnings per share?

3) Balance sheet

a) Why do accounts receivable appear net of the allowance for uncollectible accounts?

b) To what does the “assets held for sale” refer? Why is this reported as a current asset?

c) What depreciation method does the company use and what useful lives does it assume for the various classes of assets? How informative is the depreciation disclosure to investors?

d) DuPont reports $2.082 billion net book value of goodwill. To what does this relate in general? Give some examples of types of goodwill that are not reflected on the company’s balance sheet? How has the accounting for goodwill been affected by recent accounting standards?

e) To what does the net investment in affiliates relate?

f) What is the minority interest account?

g) What is the difference between authorized and issued common stock? What is the difference between the common stock and additional paid in capital accounts in stockholders’ equity?

h) How did the treasury stock account arise?

i) What items are included in accumulated other comprehensive income (loss)?

j) What are reinvested earnings?

k) What portion of the company’s financing has come from shareholders?

l) How are the balance sheet and the income statement linked?

4) Statement of cash flows

a) DuPont generated about $3.2 billion of operating cash flow despite reporting a net profit for 2003 of $1.8 billion. Why?

b) Why is depreciation expense and separation charges reported as positive amounts in the statement of cash flows?

c) Why are gains from the sale of businesses (2002) reported as a negative amount?

d) Provide an overview of the cash flow picture for DuPont?

5) Look at the segment disclosure footnote (Note 32). The following is GAAP relating to segment disclosure:

Segment of a business - a component of an entity whose activities represent a major line of business or class of customer. A segment may be in the form of a subsidiary, a division, or a department. Its assets, results of operations, and activities can be clearly distinguished, physically and operationally, and for financial reporting purposes, from the other assets, results of operations, and activities of the entity (APB 30). FASB issued a new accounting statement, SFAS 131, Disclosures about Segments of an Enterprise and Related Information. This statement supersedes SFAS 14, 18, 21, 24, and 30, and changes the way public businesses are required to report disaggregated information in financial reports to shareholders, including interim reports. The statement defines operating segments as distinct revenue-producing components of the enterprise about which separate financial information is produced internally, and whose operating results are regularly reviewed by the enterprise. The approach used in SFAS 131 is a “management approach,” meaning it is based on the way management organizes segments internally to make operating decisions and assess performance. The management approach will facilitate consistent descriptions of an enterprise for both internal and external reporting and, in general, provides that external financial reporting will more closely conform to internal reporting.

1. What kind of information does the segment disclosure provide?

2. What kind of analysis can you do with this information?

3. Company managements strenuously resisted increased disclosure of segment data. Why do you think they did?

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