Chapter 12 Solutions 5th Edition - 112612 Final
3805 words 16 pagesChapter 13
Communication and Governance
1. Amazon’s inventory increased from $3.2 billion on December 31, 2010, to $5.0 billion one year later. In addition, sales for the fourth quarter of those years increased from $12.9 billion in 2010 to $17.4 billion in 2011. What is the implied annualized inventory turnover for Amazon for these years? What different interpretations about future performance could a financial analyst infer from this change? What information could Amazon’s management provide to investors to clarify the change in inventory turnover? What are the costs and benefits to Amazon from disclosing this information? What issues does this change raise for the auditor? What additional tests would …show more content…
Overall, the benefits and costs of disclosing this type of information are likely to be greater for the high-technology firm than for the low-cost retailer. Financial statement information will typically provide a better understanding of the low-cost retailer than the high-tech firm. Most of the retailer’s assets are tangible and its costs and performance are reasonably well captured by financial statements. A high-tech firm’s most significant assets are often intangible (e.g., R&D, patents, trade secrets, etc.), and financial statements have a more difficult time capturing these values. Thus, voluntary disclosure is likely more important to the understanding of the high-tech firm rather than the low-cost retailer. Of course, voluntary disclosure is also likely to be more costly for high-tech firms, since their key information is more likely to be proprietary. In addition, higher business uncertainty for high-tech firms potentially increases the risk of legal liability arising from voluntary disclosure.
3. Management frequently objects to disclosing additional information on the grounds that it is proprietary. For instance, when the FASB proposed to expand disclosures on (a) accounting for stock-based employee compensation (issued in December 2002) and (b) business segment performance