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MFE 6110 - Financial Statement Analysis - Ohio University
Assignment for General Motors Company and Ford Company II.
Question 1. What are the revenue recognition policies for each company? Please compare and contrast.
Answer - Revenue recognition policy analysis:
In case of Ford Motor company the company is recognizing the revenue when the obligations and conditions of the contact with customers are satisfied. The condition is mainly met when the motor vehicle, part of vehicle and accessories are transferred to customer. The company recognize the revenue consideration as the amount received from customers excluding taxes. The company recognize the revenue on vehicle service contracts when base warranty period expires. The company recognizes the revenue when the goods is dispatched to customers and in case of vehicle finance sale, the revenue vary on account of changes in marketing incentive and returns. (Page FS-16, annual report 2018)
In case of General Motors, the company recognize the revenue when the control is transferred to customers rather than transfer of risk and rewards of a good. The company has adopted modified retrospective method for all noncompleted contracts. The company recognized or defer the consideration as revenue for the amount received for the services which will be provided in future such as repair and maintenance contracts. The cost associated with sales are recognized in cost of sales separately. In case of daily rental vehicle, the revenue is recognized at the time of transfer of vehicle. (Page 51, annual report 2018)
The accounting policies for recognition of revenue are almost equivalent in case of both the companies.
Question 2. How do the two companies account for their intangible assets? What similarities and differences do you see in these policies between the two companies.
Answer - Intangible assets accounting analysis:
In case of General Motors, the indefinite lived assets and goodwill are not amortized but annual impairment testing is done on annual basis and accordingly is impaired. The intangible assets are mainly comprised of licensing and advertising contracts, land rights and customer and technology contracts. The intangible assets are amortized over useful life of asset. (Page FS 11, annual report 2018)
In case of Ford Motor Company, the intangible assets are included brand names, customer and dealer relationship network, and intellectual property but excluding goodwill. These assets are amortized on SLM basis or an accelerated amortization method over useful life of asset. The amortization of developed technology and intellectual property is recorded in cost of sales and other are recorded in general, selling and administrative expenses. Impairment is also recoded under general selling and admin expense. Goodwill is amortized based on impairment testing annually. (Page 55, annual report 2018)
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Question 3. How do the two companies account for their property, plant and equipment? what similarities and differences do you see in the policies between these two companies.
Answer - Accounting for Plant, Property and Equipment (PPE):
In case of General Motors, the PPE is recorded at cost less accumulated depreciation and impairment. PPE are depreciated shorter of useful life of asset or SLM method. The useful life of asset is generally ranging from three to thirty-six years. (Page FS 35, annual report 2018)
In case of Ford Motor Company, the company is recording PPE at cost including internal use software. The major repair and improvements which extend the life of asset are also capitalized. The company is adopting straight line method for depreciation. Leasehold improvements are amortized over the lease period or useful life of assets whichever is lower. The capital lease amortization is included in depreciation expense. On retirement and disposal of asset, the gain or loss is recognized in income statement and the asset and its depreciation is eliminated from asset block. Impairment is recorded in cost of sales. (Page 54, annual report 2018)
Accounting for PPE is same for both the company.
Question 4: How do the two companies account for their inventory? What inventory method(s) do they use and how/what costs are allocated to inventory versus being expensed as a period cost.
Answer - Accounting for Inventory:
In case of Ford Motor Company, the company inventories are valued at lower of cost or net realizable value. (Page FS 34, annual report 2018)
In case of General Motors, inventories are valued at lower of cost or net realizable value. NRV is the estimated selling price net of cost to sell, product warranty cost and cost of estimated sales incentive. NRV for off lease and other vehicles is current auction sale value less disposal and warranty cost. (Page 54, annual report 2018)
The accounting policies for inventory valuation are almost equivalent in case of both the companies. Both the companies are using the FIFO method for inventory valuation i.e. determination of cost of inventory.
Question 5: How does each company account for their borrowing costs and where are these costs presented on their financial statements?
Answer - Accounting for borrowing costs:
In case of General Motor Company, the borrowing cost is recognized in income statement under interest cost and cost on qualifying asset is capitalized in cost of asset. (Page FS 3, annual report 2018)
In case of Ford Motor Company, the borrowing cost on debts is recognized in income statement under finance cost/ interest expense. The cost related to qualifying asset is capitalized to that assets upto the period of construction as per applicable accounting cost. Further the interest cost movement is also shown in cash flow under financing activities. (Page 69, 47 - annual report 2018)
The accounting and disclosure for both the companies are same.
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