Analyzing and Interpreting Income Components and Disclosures The income statemen
ID: 2775141 • Letter: A
Question
Analyzing and Interpreting Income Components and Disclosures
The income statement for Xerox Corporation follows.
Notes:
The income statement includes sales of Xerox copiers and revenue earned by a finance subsidiary that provides loan and lease financing relating to the sales of these copiers.
Equity in net income of unconsolidated affiliates refers to income Xerox earned on investments in affiliated (but unconsolidated) companies.
(a) Which of the following best describes how sales, service, and finance revenues should be recognized?
Sales, service, and finance revenues should be recognized when cash is collected.
Sales, service, and finance revenues are recognized when earned, regardless of when cash is collected.
Sales and service revenues are recognized when the sale is made or the service is performed. Finance revenues are recognized when the loan is initially made.
Sales and finance revenues are generally recognized when the sale is made and the loan is extended to the customer. Service revenues are deferred until the end of the service contract, at which time they are recognized in full.
(b) Compute the relative size of Sales revenue (total) and of revenue from Service, outsourcing and rentals. Hint: Scale each type of revenue by Total revenue.
(c) Xerox reports research, development and engineering expenses (R&D) each year. Compare R&D spending over the three years. Hint: Scale R&D by Total revenue each year.
What statement provides the best explanation for the R&D expense as a % of total revenue trend we calculated above?
R&D expense percentage remained fairly constant over the three years, because R&D expense increased as sales increased.
R&D spending decreased in the current year, while total revenues increased.
R&D spending has decreased each year, while total revenue has increased each year.
Although R&D expense decreased in 2009, so did total revenue, so the percentage actually increased.
(d) Which of the following statements best summarizes our observations about Xerox's reported restructuring costs?
Negative restructuring expense implies that a previous year's restructuring accrual was understated.
Restructuring costs should be expensed in the period the restructuring program is announced, regardless of when they are paid or when the assets are formally written off.
Restructuring costs should be treated as transitory regardless of their frequency of occurrence.
Restructuring costs should only be expensed when paid or when the asset is formally written off.
(e) Which of the following best summarizes our conclusion about the potential use of "other expense" accounts to obscure actual financial performance.
We need not worry about the reporting of "other expense" accounts because the threshold for materiality is so low that the majority of items are not classified in such accounts.
Companies are not allowed to commingle income increasing and income decreasing accounts as this would reduce the usefulness of such an account.
Companies are not required to separately disclose revenue and expense items unless they are deemed to be material. Such aggregation may reduce the usefulness of income statements.
GAAP does not permit the use of "other expense" accounts because they are not specific enough.
Year ended December 31 (in millions) 2009 2008 2007 Revenues Sales $6,646 $8,325 $8,192 Service, outsourcing and rentals 7,820 8,485 8,214 Finance income 713 798 822 Total Revenues 15,179 17,608 17,228 Cost and expenses Cost of sales 4,395 5,519 5,254 Cost of service, outsourcing and rentals 4,488 4,929 4,707 Equipment financing interest 271 305 316 Research, development, and engeineering expenses 840 884 912 Selling, administrative and general expenses 4,149 4,534 4,312 Restructuring and asset impairment charges (8) 429 (6) Acquisition-related costs 72 -- -- Amortization of intangible assets 60 54 -- Other expenses, net 285 1,033 295 Total Cost and Expenses 14,552 17,687 15,790 Income (Loss) before Income Taxes, and Equity Income 627 (79) 1,438 Income tax expenses (benefits) 152 (231) 400 Equity in net income of unconsolidated affiliates 41 113 97 Net income 516 265 1,135 Less: Net income attributable to noncontrolling interests 31 35 -- Net Income attributable to Xerox $485 $230 $1,135Explanation / Answer
Answer:(a) Sales and service revenues are recognized when the sale is made or the service is performed. Finance revenues are recognized when the loan is initially made.
Answer:(b) Compute the relative size of Sales revenue (total) and of revenue from Service, outsourcing and rentals.
Answer:(c) Xerox reports research, development and engineering expenses (R&D) each year. Compare R&D spending over the three years. Hint: Scale R&D by Total revenue each year.
Although R&D expense decreased in 2009, so did total revenue, so the percentage actually increased.
Answer:(d) Restructuring costs should only be expensed when paid or when the asset is formally written off.
Revenue in $ millions As % of Total Revenue Particulars 2009 2008 2007 2009 2008 2007 Sales 6646 8325 8192 45.94221 49.52409 49.93295 Service,outsourcing and rentals 7820 8485 8214 54.05779 50.47591 50.06705 Total Revenues 14466 16810 16406