ACCOUNTING STANDARDS AND TOPICS IMPLEMENTED AND ANALYZED

The financial statements that were included were the consolidated statements of operations, the consolidated statements of comprehensive income, and the consolidated balance sheets.. Con

ACCOUNTING STANDARDS AND TOPICS IMPLEMENTED AND ANALYZED

by Makenzie Courtland McNeill

A thesis submitted to the faculty of The University of Mississippi in partial fulfillment of

the requirements of the Sally McDonnell Barksdale Honors College

OxfordMay 2019

Approved by

Advisor: Dr Victoria Dickinson

Reader: Dean Mark Wilder

ABSTRACTMAKENZIE COURTLAND MCNEILL: Accounting Standards and Topics Implemented and

Analyzed(Under the direction of Dr Victoria Dickinson)

The objective of this thesis is to report on multiple accounting standards and topics through the use of twelve different cases The cases that were researched included the topics of evaluation of financial statements, profitability and earnings, accounts

receivable, and working through a time value of money problem Additionally, subjects such as research and development costs, the data analytics tool IBM Watson, long-term debt, stockholders’ equity, marketable securities, deferred income taxes, and revenue recognition were also analyzed throughout this paper These cases were written to help the reader, and others, learn from their questions The questions in the cases, as shown

in this paper, are meant to act as a guidance and learning tool though the various accounting standards listed above

TABLE OF CONTENTS

Case Study One – Home Heaters: Financial Statements Analyses……… 1

Case Study Two – Molson Coors: Profitability and Earnings Persistence……… 18

Case Study Three – Pearson plc – Accounts Receivable……….….……… ……… 24

Case Study Four – Time Value of Money Accounting Problem ……… … 32

Case Study Five – Palfinger AG – Property, Plant, and Equipment……… ……… …… 36

Case Study Six – Volvo Group – Research & Development Costs………….……….….…… 44

Case Study Seven – Data Analytics Case - IBM Watson……….……… …… 51

Case Study Eight – Rite Aid Corporation – Long-Term Debt……….………… …… 57

Case Study Nine – Merck & Co., Inc and GlaxoSmithKline plc – Shareholders’ Equity… 65 Case Study Ten – State Street Corporation – Marketable Securities…….……… …… 72

Case Study Eleven ZAGG Inc – Deferred Income Taxes……… ….…… …… 79

Case Study Twelve – Apple Inc – Revenue Recognition……… ……… …… 86

LIST OF REFRENCES……….…… 91

CASE ONEHome Heaters, Inc.: Financial Statements Analyses

This case surrounded two companies, Glenwood Heating, Inc and Eads Heaters, Inc., which both sell home heating units Throughout the year, both businesses had identical operations and transactions, including the issuance of stock, purchases of equipment, and payments of dividends These transactions are described and listed throughout Part A of this case At year end, the managers of each company were faced with accounting decisions that would affect how their accounting statements would be prepared Thus, Part B of this case described how Glenwood Heating, Inc and Eads Heaters, Inc differentiated in recording five transactions Because both companies began the year identically, this case helps us understand the effects that various

manager’s accounting decisions can have on a company’s financial statements at the end

of the year

As a whole, this case was very beneficial as a learning tool for many reasons First, I feel that I learned a significant amount about how to read and draw data from sizable text into a spreadsheet, such as Excel I haven’t had much experience with this before, so spending a great deal of time on this case familiarized myself with the

process This case also helped me with my organizational, time management, and group skills, which I needed in order to finish such a project In addition, the case encompassedseveral accounting skills that I had not used in a while It pushed me to review a few ideas, as well as follow through the complete process from journaling transactions to financial statements, like I would in the real world I can see my experience from this case benefiting me in the future, specifically in my other classes

Part A

Home Heaters Trial Balance - Part A

Part B

Glenwood Heating, Inc.:

(99,400 * 01)

((80,000-8000)/8)

Eads Heaters, Inc.:

Allowance for Doubtful Accounts 4,907(99,400 * 05)

(1/8 * 2 * 80,000)

Glenwood Heating, Inc.

Part B – Recording of Additional Information (continued)

Table 1 (continued)

Liabilities Stockholder's Equity

AccountsPayable InterestPayable PayableNote CommonStock RetainedEarningsBalances: Part A $26,440 $6,650 $380,000 $160,000 $313,450

Glenwood Heating, Inc.

Part B: Trial Balance December 31, 20X1

Other Operating Expenses 34,200

Operating Expenses

Other Expenses

Glenwood Heating, Inc.

Statement of Retained Earnings For Year Ended December 31, 20X1

92,742

Glenwood Heating, Inc.

Balance Sheet December 31, 20X1

ASSETSCurrent Assets

Property, Plant, and Equipment

Eads Heaters, Inc.

Part B – Recording of Additional Information (continued)

Liabilities Stockholders' Equity Accounts

Payable Interestpayable PayableNotes PayableLease Common Stock Retained Earnings

The financial information provided by the two companies is valuable to present and possible equity lenders and creditors in making decisions about providing resources

or investments to companies According to the information from this case, I would rather invest or lend money to Glenwood Heating, Inc for several reasons First, from their income statement, it is seen that they have a net income of $92,742, and a gross profit of $221,500 Both of these outweigh Eads Heaters, Inc.’s net income and gross profits of $70,515 and $209,700, respectively, leading me to believe that they are more profitable From the statement of retained earnings, it can be seen that Glenwood Heating, Inc has a year-end retained earnings balance of $139,084, which is $37,094 more that can be reinvested in its business than its competitor, that had a year-end retained earnings balance of $101,990 In addition, it can be concluded from the balancesheet that Glenwood has a larger amount of current assets on hand, at $161,632, rather than $145,430 for Eads Also, the proportion of current assets to current liabilities is more concerning in Eads case than in Glenwood, because of the higher amount of current liabilities that Eads has collected For these reasons, I would choose to invest or lend money to Glenwood Heating, Inc

CASE TWOMolson Coors: Profitability and Earnings Persistence

This case was focused on Molson Coors Brewing Company, which formed when Adolph Coors Company joined with Molson Inc in 2005 The case included the

company’s financial statements, followed by notes The financial statements that were included were the consolidated statements of operations, the consolidated statements

of comprehensive income, and the consolidated balance sheets The notes to the

consolidated financial statements went into greater detail about several items on the financial statements to help the user better understand the numbers and totals on the statements Some of the items discussed in the notes section include excise taxes, cost

of goods sold, special items, other income and expense, income tax, and revenue

recognition

After having to review the income statement, its major parts, and its importance

in the accounting cycle, I feel that I have a greater understanding of the purpose of financial statements It is important to know how to predict for the future using the items given to you in the financial statements You hope that the numbers are precise so that you can make the most accurate prediction possible regarding your business or investments In addition, I have a better knowledge of what comprehensive income is, and how it differs from net income after answering the questions in this case Also, I learned about some classification items that I was not familiar with prior to this case, such as “Special items” The categorization of items on the financial statements is

important, because the misplacement of one thing could throw off the ending balance completely

Molson Coors Brewing Company – Profitability and Earnings Persistence Concepts

a What are the major classifications on an income statement?

The major classifications that an income statement contains are the operating section, nonoperating section, income tax, discontinued operations,

noncontrolling interest, and earnings per share The operating section would include sales, cost of goods sold, selling expenses, and administrative or general expenses Nonoperating section additionally comprises of other revenues and gains and other expenses and losses Also, discontinued operations is material gains or losses resulted from the disposition of a component of the business Finally, noncontrolling interest can be described as the allocation of income to noncontrolling shareholders

b Explain why, under U.S GAAP, companies are required to provide “classified” income statements.

Companies are required to provide classified income statements because it leaves less room for dishonestly, in addition to making them easier for the user

to read According to the Full Disclosure Principle, companies must include all details sufficient enough to make a difference to users in their financial

statements Thus, most income statements will have to be detailed, and classifiedincome statements help keep the increased information organized This helps thereader analyze the information efficiently

The types of information that a classified income statement provides includes subtotals for three specific sections These sections include the gross margin, operating expenses, and non-operating expenses sections of an income statement When there are many line items, by being able to easily spot

subtotals for these sections allows the user to gather information From a

classified income statement, a user could make conclusions as to whether the company had a net profit or loss for the period or was able to produce a profit This could lead a user to want to invest in a company, or vice versa

c In general, why might financial statement users be interested in a measure of persistent income?

Financial statement users want to have a level of trust when reading their

financial statements, and are expecting that the information given is free from error They are hopeful that they can make accurate predictions about the future based off of the income from the financial statements.An example of users that might benefit from this information include investors and creditors, investment analysts, and competitors Competitors might use financial statements of a rival company to gage how well they might do in the future

d Define comprehensive income and discuss how it differs from net income.

Comprehensive income is the change in equity of an entity during a period from transactions and other events and circumstances from nonowner sources It includes all changes in equity during a period except those resulting from

investments by owners and distributions to owners Net Income can be defined

as the residual amount of earnings after all expenses have been deducted from sales Where comprehensive income is used to measure the change in an

owner’s interest in a business, net income is really just the measure of earnings for a period

i In general, what types of items does Molson Coors include in this line item?

Molson Coors includes infrequent or unusual items, impairment or asset

abandonment-related losses, restructuring charges and other atypical employee related costs, and fees on termination of significant operating agreements and gains (losses) on disposal of investments in the “Special items” line item

ii Explain why the company reports these on a separate line item rather than including them with another expense item Molson Coors classifies these special items as operating expenses Do you concur with this classification? Explain.

Special items are reported on a separate line item rather than including them with another expense item because they are not indicative of core operations Yet, they are included so investors can more accurately compare the company’s numbers across accounting periods I agree that it is important to separate these items, but they should be included so that investors can be made aware of them

g Consider the income statement item “Other income (expense), net” and the information in Note 6 What is the distinction between “Other income

(expense), net which is classified a nonoperating expense, and “Special items, net” which Molson Coors classifies as operating expenses?

Other income expenses do not directly affect the income portion of the income statement; thus they are classified as a nonoperating expense However, Molson Coors is directly impacted by the Special items, which is why they are classified asoperating expenses

h Refer to the statement of comprehensive income.

i What is the amount of comprehensive income in 2013? How does this

amount compare to net income in 2013?

The amount of comprehensive income in 2013 is $760.20 (million) The amount

of net income in 2013 is $567.30 (million) The comprehensive income is $192.90(million) greater than the net income

ii What accounts for the difference between net income and comprehensive income in 2013? In your own words, how are the items included in Molson Coors’ comprehensive income related?

The difference between the net income and comprehensive income in 2013 include foreign currency translation adjustments, unrealized gain (loss) on

derivative instruments, reclassification of derivative (gain) loss to income, tensionand other postretirement benefit adjustments, amortization of net prior service (benefit) cost and net These items are related because the items have not been realized yet, and therefore would be challenging to record them

Analysis

j Consider the information on income taxes, in Note 7.

What is Molson Coors’ effective tax rate in 2013?

Effective Tax Rate

= 12.8%

CASE THREE

Pearson plc – Accounts Receivable

Pearson Inc is a case that concentrates on the topic of accounts receivable, and the various components that can go into this subject It is important to note that

Pearson is an education and business information company located in London, England, therefore their financial statements are recorded in millions of pounds, not U.S dollars Included in this case are the focuses of accounts receivables, notes receivables, contra accounts (such as sales returns and allowances, allowance for sales returns and

allowances, and allowance for doubtful accounts), and bad debts expense In addition, this case asks several times for t-accounts and journal entries, which I feel is significant

to do to understand the fundamental basis of what I am doing in a problem

First, after reviewing the major elements of receivables, I feel more

understanding of the importance of accounts receivable, and how they are used in major business operations such as this one Additionally, this case taught me several things about the critical thinking needed to consider when financial statements are done

in one country and are needed to be converted and analyzed by another country These are things that happen in the real world every day, and it is crucial that I begin to

implement my accounting knowledge to everyday situations I also learned about the term “provision” and that they use it to mean “allowance” in the UK

Pearson plc – Accounts Receivable Concepts

a What is an account receivable? What other names does this asset go by?

Accounts receivable is money owed to a company by its debtors Other names this asset goes by may include trade receivables and receivables

b How do accounts receivable differ from notes receivable?

A notes receivable is an asset of a company that holds a written promissory note from another party (resulting from sales, financing, or other transactions), whereas an accounts receivable does not require a written promissory note for the receivable An accounts receivable is simply an on an oral promise to pay Accounts receivable are usually short-term, collected within 30 to 60 days, but notes receivable can either be short-term or long-term Additionally, notes receivable are often interest-bearing, while accounts receivable are not

c What is a contra account? What two contra accounts are associated with Pearson’s trade receivables (see Note 22)? What types of activities are captured in each of these contra accounts? Describe factors that managers might consider when deciding how to estimate the balance in each of these contra accounts

A contra account is a general ledger account which is intended to have its

balance reduce the normal balance for its corresponding account Contra

accounts allow some flexibility in the presentation of financial information The two contra accounts associated with Pearson’s trade receivables are allowance for bad debts (called provision for bad and doubtful debts in the UK) and

allowance for sales returns (called provision for sales returns in the UK)

Managers might consider customers’ credit histories or credit scores when estimating allowance for bad debts and allowance for sales returns Companies must also take into consideration economic conditions

d Two commonly used approaches for estimating uncollectible accounts receivable are the percentage-of-sales procedure and the aging-of-accounts procedure Briefly describe these two approaches What information do managers need to determine the activity and final account balance under each approach? Which of the two approaches

do you think results in a more accurate estimate of net accounts receivable?

The percentage-of-sales procedure is using credit sales from the period to

estimate the uncollectible accounts receivable as a percentage The formula for this is:

Bad Debts Expense = Estimated % x Credit Sales

From this, historical data and other various factors are used to determine which accounts should be uncollectible

The aging-of-account procedure organizes a company’s accounts receivable according to the length of time an invoice has been outstanding Those that have been unpaid for a longer period of time are deemed to have a higher likelihood

of default, and are more likely to be considered uncollectible

I feel that the aging-of-accounts procedure results in a more accurate estimate ofnet accounts receivable because it considers the factors affecting each individual customer

e If Pearson anticipates that some accounts will be uncollectible, why did the

company extend credit to those customers in the first place? Discuss the risks that managers must consider with respect to accounts receivable.

One reason companies will extend credit to customers in the first place is

because it could encourage sales because of the ease of payment up front Also,

it is very difficult for a company to know a person’s inability to pay prior to a sale.There is always risk that the debtor will fault in payment with any type of credit, but as a company it may be less of a risk than not offering the use of credit to customers at all

Process

balance in the provision for bad and doubtful debts account The exchange differences line item accounts for the exchange rate that differed from country to country, and thus resulted in a debit of

£5,000,000 The £26,000,000 credit is the estimate of bad debts expense for 2009, and then the £20,000,000 debit is the actual bad debt being written off in 2009, also called housekeeping An additional credit balance

of £3,000,000 is made from acquiring another business At the end of

2009, Pearson Inc is left with a credit balance of £76,000,000 in this account

ii Prepare the journal entries that Pearson recorded during 2009 to capture 1) bad and doubtful debts expense for 2009 (that is, the “income statement movements”) and 2) the write-off of accounts receivable (that is, the amount

“utilized”) during 2009 For each account in your journal entries, note whether the account is a balance sheet or income statement account

1) 1/1/09 Bad Debt Expense 26,000,000

Provision for Bad and Doubtful Debts 26,000,0002) 12/31/09 Provision for Bad and Doubtful Debts 20,000,000

Accounts Receivable 20,000,000Bad debts expense is an income statement account, and provision for badand doubtful debts and accounts receivable are both balance sheet accounts

iii Where in the income statement is the provision for bad and doubtful debts expense included?

This account would be included in the current expense portion of the income statement It is included in operating expenses, which is separated from the other expenses section of the income statement Estimated sales returns are deducted from gross sales, and thus this reaches the total of net sales

g Note 22 reports that the balance in Pearson’s provision for sales returns was £372 at December 31, 2008 and £354 at December 31, 2009 Under U.S GAAP, this contra

account is typically referred to as an “allowance” and reflects the company’s

anticipated sales returns

i Complete a T-account that shows the activity in the provision for sales returns account during the year Assume that Pearson estimated that returns relating to 2009 Sales to be £425 million In reconciling the change

in the account, two types of journal entries are required, one to record the estimated sales returns for the period and one to record the amount of actual book returns

443,000,000

ii Prepare the journal entries that Pearson recorded during 2009 to capture, 1) the 2009 estimated sales returns and 2) the amount of actual book returns during 2009 In your answer, note whether each account in the journal entries

is a balance sheet or income statement account

1) 1/1/09 Sales Returns and Allowances425,000,000

Provision for Sales Returns 425,000,0002) 12/31/09 Provision for Sales Returns 443,000,000

iii In which income statement line item does the amount of 2009 estimated sales returns appear?

The estimated sales returns would appear in the sales line item of an income statement as a contra-revenue account, because this account has the opposite effect on net income from sales

h Create a T-account for total or gross trade receivables (that is, trade receivables before deducting the provision for bad and doubtful debts and the provision for sales returns) Analyze the change in this T-account between December 31, 2008 and 2009 (Hint: your solution to parts f and g will be useful here) Assume that all sales in

2009 were on account That is, they are all “credit sales.” You may also assume that there were no changes to the account due to business combinations or foreign exchange rate changes Prepare the journal entries to record the sales on account and accounts receivable collection activity in this account during the year

sales, thus that number is £5,624,000 So the credit balance for the trade receivables account is £5,679,000

CASE FOURTime Value of Money Accounting Problem

This is a difficult problem from Chapter 6 (Accounting and the Time Value of Money) from intermediate accounting I am working out this problem as if I was

teaching a poorly skilled intermediate student

Problem 6-4:

Julia Baker died, leaving her husband Brent an insurance policy contract that provides that the beneficiary (Brent) can choose any one of the following four options

(a) $55,000 immediate cash

(b) $4,000 every 3 months payable at the end of each quarter for 5 years

(c) $18,000 immediate cash and $1,800 every 3 months for 10 years, payable at

the beginning of each 3-month period

(d) $4,000 every 3 months for 3 years and $1,500 each quarter for the following

25 quarters, all payments payable at the end of each quarter

If the money is worth 2 ½ % per quarter, compounded quarterly, which option would you recommend that Brent exercise?

First, to do this problem, you would need to understand the difference between present values and future values, and ordinary annuity and annuity dues Present values are the value now of a future sum or sums discounted assuming compound interest Future value is the value at a future date of a given sum or sums invested assuming compound interest Ordinary annuities are annuities where the rents occur at the end ofeach period, and annuity dues are where the rents occur at the beginning of each period

For this problem, I will calculate each parts (b)-(d) in present value in order to compare it to (a) $55,000 that Brent could receive immediately

For part (b) I would use the formula:

PV = Rent (PVF n=15, i=2 ½)

I got 15 periods from multiplying 5 x 12, and then dividing by 4 (since it

compounded quarterly) Then I would plug in the rent and number found from Table 6-4 Present Value of an Ordinary Annuity

PV = 4,000 (12.38138) = $ 49,525.52For part (c) I would calculate for an annuity due, since it is payable at the

beginning of each of the 3 periods It would go as follows:

PV = Rent (PVF n=30, i=2 ½) = 1,800 (21.45355) = $ 38,616.39 + (the immediate cash) $18,000 = $ 56,616.39

I got the period amount of 30 my multiplying 10x12 and then dividing by 4 For part (d), I would calculate by using the present value for ordinary annuities formula and table I would calculate the amounts for this part as follows:

PV = Rent (PVF n=9, i=2 ½) = 4,000 (7.97087) = $ 31,883.48

I calculated the period amount of 9 by multiplying 3x12 and then dividing by 4

PV = Rent (PVF n=25, i=2 ½) = 1,500 (18.42438) = $ 27,636.57When you add these two amounts together you get a total of $59,520.05.

Thus, I would recommend option (d) to Brent, as it results in the greatest amount

of money for him He might not get it all immediately, but it allows him the greatest return from his wife’s insurance policy

CASE FIVEPalfinger AG – Property, Plant, and Equipment

Palfinger AG is a company that manufactures large machines such as cranes, forklifts, and tailgates for various industries These industries include construction, agriculture and forestry, and transport In order to construct these hefty machines and solutions, Palfinger requires a great deal of property, plant, and equipment This case follows this company in the 2007 fiscal year, and lists their consolidated balance sheet and income statement, as well as the corresponding notes related to these financial statements These notes give the reader a better understanding of the property, plant, and equipment acquired by Palfinger This company is located in Austria and reports their financial statements in Euros.

This case was helpful in getting a better understanding of property, plant, and equipment for a large company such as Palfinger I grew in my knowledge of how to analyze depreciation, using and comparing both the straight-line and double-declining balance depreciation methods for the same time period I also learned what

“prepayments and assets under construction” meant, which I did not know prior to this case It was beneficial for me to have to calculate gains or losses for the period under thetwo depreciation policies, and compare them against each other This gave me a greater understanding of what certain calculations mean