Chapter 4 Solutions

1005 words 5 pages
Question 11.

In early 2003 Bristol-Myers Squibb announced that it would have to restate its financial statements as a result of stuffing as much as $3.35 billion worth of products into wholesalers’ warehouses from
1999 through 2001. The company’s sales and cost of sales during this period was as follows:

| 2001 | 2000 | 1999 | Net sales | $18,139 | $17,695 | $16,502 | Cost of products sold | 5,454 | 4,729 | 4,458 |

The company’s marginal tax rate during the three years was 35 percent. What adjustments are required to correct Bristol-Myers Squibb’s balance sheet for December 31, 2001? What assumptions underlie your adjustments? How would you expect the adjustments to affect Bristol-Myers Squibb’s performance in the coming
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The following proportion of the receivables was past due on the reporting date:

| 2007 | 2008 | Not past due on the reporting date | (53.6%) 4,039 | (55.8%) 4,029 | Past due on the reporting date | (46.4%) 3,491 | (44.2%) 3,195 | Total | (100.0%) 7,530 | (100.0%) 7,224 |

The changes in Deutsche Telekom’s allowance for doubtful receivables were as follows:

Item | 2007 | 2008 | Allowance on January 1 | 1,148 | 1,071 | Currency translation adjustments | (8) | (7) | Additions (allowance recognized as expense) | 662 | 547 | Use | (510) | (437) | Reversal | (221) | (151) | Allowance on December 31 | 1,071 | 1,023 |

Assume that Deutsche Telekom’s statutory tax rate was 30.5 percent in 2007 and 2008. Further assume that an analyst wishes to recognize an additional allowance for 20 percent of the receivables that are past due on the reporting date. i. What adjustments should the analyst make to Deutsche Telekom’s balance sheet at the end of 2007?

ii. What adjustments should the analyst make to Deutsche Telekom’s 2008 income statement?

If the analyst decided that receivable allowances for DT in 2007 should be

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