Chapter 4 Solutions Essay

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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 | $16,502 | Cost of products sold | 5,454 | 4,729 | 4,458 | The company’s marginal tax rate during the three years was 35 percent. What adjustments are required to correct Bristol-Myers Squibb’s balance sheet for December 31, 2001? What assumptions underlie your adjustments? How would you expect the adjustments to affect Bristol-Myers Squibb’s performance in the coming…show more content…
The decline in both Tax Expense and in Net Profit are reflected in the Balance Sheet by a decline in Deferred Taxes and in Ordinary Shareholders' Equity, respectively. Adjustments for Dec.31, 2001 ($billions) Assets Liabilities & Equity Balance Sheet Trade Receivables -3.35 Inventories +1.00 Deferred Taxes -.82 Ordinary Shareholders' Equity -1.53 Income Statement Adjustments for Dec.31, 2001 Sales -3.35 Cost of Sales -1.00 Tax Expense -.82 Net Profit -1.53 Question 13. On March 31, 2006, Germany’s largest retailer Metro AG reported in its quarterly financial statements that it held inventories for 54 days sales. The inventories had a book value of €6,345 million. How much excess inventory do you estimate Metro is holding in March 2006 if the firm’s optimal Days’ Inventories is 45 days? Calculate the inventory impairment charge for Metro if 50 percent of this excess inventory is deemed worthless? Record the changes to Metro’s financial statements from adjusting for this impairment. Metro’s inventories on March 31, 2006 were €6.345 billion, equivalent to 54 days. If the optimal days’ inventories was 45 days, the value of the optimal inventories would be 45/54*€6.345 billion, or $5.288 billion. If 50% of the gap (50%*(6.345-5.288)=$0.529 billion was impaired, the changes to Metro’s
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