Chapter 12, Problem 31P

a.

To determine

Assure that company, WD’s segments exceeds one or more of the quantitative thresholds for the year 2017.

Explanation of Solution

The business components that are specified in the management framework are referred to as operating segments.

An operating segment is a component of business entity:

•    that engages in commercial activities from which it can gain revenues and acquire expenses (including revenues and expenses related to transactions with other components of the same entity),

•    whose operating results are periodically checked by the management from a decision-making perspective on the resources to be assigned to the segment and to evaluate its performance, and

•    for which separate financial information is available.

An organization shall report information separately on an operational segment that meets any of the following quantitative thresholds:

•    Its reported revenues, including both sales to external customers and intersegment sales or transfers, constitute 10% or more of the total revenues, both internal and external, of all operating divisions.

•    The absolute amount of its reported profit or loss is 10% or more of the total amount of (i) the combined estimated income of all operating segments that did not report losses and (ii) the combined reported loss of all operating segments that reported losses.

•    The assets are 10% or more of the total assets of all operating divisions.

If an operational segment meets any one of the above three quantitative thresholds based on revenues, profit, and assets, it must be disclosed in the footnotes.

The quantitative threshold tests are as follows:

Revenues	2017
Media Networks	43%
Parks and Resorts	33%
Studio Entertainment	15%
Consumer Products & Interactive Media	9%
	100%
Operating Income	2017
Media Networks	47%
Parks and Resorts	26%
Studio Entertainment	16%
Consumer Products & Interactive Media	12%
	100%*
Assets	2017
Media Networks	37%
Parks and Resorts	34%
Studio Entertainment	19%
Consumer Products & Interactive Media	10%
	100%

In 2017, Media Networks, Parks and Resorts and Studio Entertainment exceed the threshold of revenue, profit (loss) and assets of 10 per cent. Consumer Products & Interactive Media is above the profit (loss) and asset threshold of 10 per cent.

b.

To determine

Rating company, WD’s operating segments contribute by the share of profit in

relationship to its share of revenue.

Explanation of Solution

The business components that are specified in the management framework are referred to as operating segments.

An operating segment is a component of business entity:

•    that engages in commercial activities from which it can gain revenues and acquire expenses (including revenues and expenses related to transactions with other components of the same entity),

•    whose operating results are periodically checked by the management from a decision-making perspective on the resources to be assigned to the segment and to evaluate its performance, and

•    for which separate financial information is available.

	Revenue	Profit
Media Networks	43%	47%
Parks and Resorts	33%	26%
Studio Entertainment	15%	16%
Consumer Products & Interactive Media	9%	12%
	100%	100%*

The segments media network, studio entertainment and consumer products & interactive media contribute equally or more to profit than their contribution to revenue. While the segment parks and resorts has a lower share of profitability contribution than their share of revenues.

c.

To determine

Calculate a rough DuPont Operating Segment analysis for 2017.

Explanation of Solution

The business components that are specified in the management framework are referred to as operating segments.

An operating segment is a component of business entity:

•    that engages in commercial activities from which it can gain revenues and acquire expenses (including revenues and expenses related to transactions with other components of the same entity),

•    whose operating results are periodically checked by the management from a decision-making perspective on the resources to be assigned to the segment and to evaluate its performance, and

•    for which separate financial information is available.

The operating segments of Company, WD's DuPont analysis are as follows:

Profit Margin	2017
Media Networks	29%
Parks and Resorts	20%
Studio Entertainment	28%
Consumer Products & Interactive Media	36%
Asset Turnover
Media Networks	0.72
Parks and Resorts	0.62
Studio Entertainment	0.51
Consumer Products & Interactive Media	0.54
ROA
Media Networks	21%
Parks and Resorts	12%*
Studio Entertainment	14%
Consumer Products & Interactive Media	19%

The Media Networks segment reported the highest return on assets for 2017, with a profit margin of 29 per cent and asset turnover of 0.72, reflecting the relative asset intensity of this line of business. Interestingly, there is a higher profit margin in the Consumer Products & Interactive Media segment (i.e. 36 percent), but a much lower asset turnover ratio (i.e., 0.54). This segment, fortunately, represents only 9 per cent of WD's total revenue. The segment Media Networks is the driver of WD's profitability and asset returns, accounting for 43 percent of WD s revenue and 37 percent of WD's assets.

d.

To determine

Over the three year period, calculate the free cash flow for each operating segment.

Explanation of Solution

The business components that are specified in the management framework are referred to as operating segments.

An operating segment is a component of business entity:

•    that engages in commercial activities from which it can gain revenues and acquire expenses (including revenues and expenses related to transactions with other components of the same entity),

•    whose operating results are periodically checked by the management from a decision-making perspective on the resources to be assigned to the segment and to evaluate its performance, and

•    for which separate financial information is available.

For the operating segments the free cash flow over the past three years is as follows:

	2017	2016	2015
Media Networks	$7,000	$7,844	$7,861
Parks and Resorts	2,582	804	944
Studio Entertainment	2,385	2,742	2,005
Consumer Products & Interactive Media	1,893	2,087	1,980
Total	$13,860	$13,477	$12,790

Media Networks consistently generates more than 50 per cent of company WD’s free cash flow.

e.

To determine

Summarize the results regarding the financial performance of the operating segments of

Company, WD and also focus on the company's future financial reports of the company.

Explanation of Solution

The business components that are specified in the management framework are referred to as operating segments.

An operating segment is a component of business entity:

•    that engages in commercial activities from which it can gain revenues and acquire expenses (including revenues and expenses related to transactions with other components of the same entity),

•    whose operating results are periodically checked by the management from a decision-making perspective on the resources to be assigned to the segment and to evaluate its performance, and

•    for which separate financial information is available.

Definitely, media networks are an important company segment. It represents 47 percent of the operating profit of the company, 43 percent of the company's revenue, and more than 50 percent of the free cash flow of the company. Its financial performance is driven by a profit margin of 29 per cent, second only to the consumer products segment and interactive media. The concern is to what degree a high profit margin can be competed off. A close eye on the market for signs of weakening or increased competitive pressure must be maintained.