Question 1: IsraBlof

On January 1, 2013, The IsraBlof Company signed a contract to transfer the Chinese Wall to the

middle of Wall Street. The project was completed in three years. The following table provides

for the expenses incurred by the constructor, AZ, in each of the three years, the amounts actually

paid in cash by AZ in each of the years, the billings to the buyer, MB, in each of the years and,

finally, actual collections from MB. Estimated and actual costs and collections were identical.

Year

Expenses

incurred by AZ

Paid in cash by

AZ

Billed to MB

Collected from

MB

2013 $32,000,000 $24,000,000 $35,000,000 $25,000,000

2014 $12,000,000 $16,000,000 $55,000,000 $60,000,000

2015 $36,000,000 $40,000,000 $10,000,000 $15,000,000

a. Prepare an income statement for AZ for each of the three years if it adopted: (i) the

percentage of completion method (where costs are used to estimate progress); (ii) the

installment method; (iii) the cost recovery method; and (iv) the completed contract method.

b. Provide the journal entries recorded by AZ during 2013 if it adopted the percentage of

completion method. What was the balance of the account, “Wall on Wall Street,” on

December 31, 2013?

c. Suppose a manager is interested in reporting the highest cumulative income from the project

at any given point in time. Which method (if any) should the manager adopt? Is there any

method(s) the manager should never adopt? What if the manager cares only about the

overall income from the completed project?

Question 2: Apple

You are given portions of Apple’s 2010 Annual Report. (Note fiscal year 2010 ends on

September 25, 2010 – all years refer to fiscal year). The file has 30 non-consecutive pages (i.e.,

many pages are “missing”), and some pages are only partially filled.

Only Materials already covered in class are required.

The rest is optional (and a good review for the final).

a. Describe in no more than three lines Apple’s business.

b. Consider Apple’s Accounting Equation for September 25, 2010 and September 26, 2009.

What is the percentage increase in the level of the equation? Which asset had the highest

growth in terms of dollar amount?

c. Calculate the Current ratio and the Quick ratio for Apple as of September 25, 2010.

d. Over the years where data exists, in which year did Apple report the highest percentage of

Gross Margin, relative to Net Sales? In which year did Apple report the highest percentage

of Net Income, relative to Net Sales?

e. Apple changed its revenue recognition policy in 2010. Briefly explain (in no more than three

lines) both the new and the old revenue recognition policies for sales of iPhone. Which

method allows higher revenue to be recognized at the time of sale, the new method or the old

method? Over life?

f. How many shares were used to calculate Apple’s Diluted Earnings Per Share in 2010? What

was the percentage impact of the dilution on the reported Basic EPS?

g. Was 2010 Net Income higher or lower than Total Comprehensive Income? What was the

main reason for the difference (item and magnitude)?

h. Which apple do you like better (i) or (ii) ? Why?

i. What was the total value of cash that customers paid, but Apple had not yet recognized as

revenue as of September 25, 2010?

Why did Apple add back Loss on Disposition of Property, Plant, and Equipment in the

Statement of Cash Flows? Why did Apple add back Stock Based Compensation Expense in

the Statement of Cash Flows? Apple added in the 2010 Statement of Cash Flows $778 for

Other Liabilities. Did such liabilities increase or decrease during the year?

k. Assume instead of deferring revenues, Apple immediately recorded the proceeds as revenue.

By how much (and in what direction) would Net Sales for 2010 change?

l. When does Apple expense warranty related costs? When does Apple expense advertising

costs?

m. Did the percentage of gross accounts receivable that Apple does not anticipate collecting

increase or decrease in 2010, relative to 2009? What kind of business partners account for

the highest percentage of trade receivables?

n. What depreciation method does Apple use? How much was the Depreciation and

Amortization on Property and Equipment in 2010?

p. What is the net balance of acquired intangible assets with definite service life as of

September 25, 2010?

q. What cost flow assumption did Apple use in valuing its inventory? What is the main

category (or categories) of inventory items?

r. Did you ever meet a Russian Spy?

s. What is the main reason for the increase in Common Stock during 2010?

t. Provide the journal entry that summarizes Apple’s Income Tax Expense for 2010. How

much was actually paid in cash by Apple for Income Taxes?

u. What statutory federal income tax rate did Apple use for 2010? What was Apple’s effective

tax rate for the same year? Which item was the most significant in explaining the difference?

As of September 25, 2010, is the market value of Apple’s available-for-sale marketable

securities above or below their costs? Which of these two measurement possibilities is

reported on the Balance Sheet? What is the amount?

w. What was Apple’s Rent Expense for its Operating Leases during 2010? How much is Apple

anticipating paying in 2012? What is the longest lease term for retail space?

x. Which geographical segment generated the highest Net Sales during 2010? Which

geographical segment has the highest percentage sales growth from 2009 to 2010? Which

quarter generates the highest sales for Apple? Does this quarter include the holiday season?

y. What are the Related Party Transactions that Apple reports on? With whom? How much?

z. A Judgment Question. After reading Apple’s 2010 Annual Report, do you observe any

irregularity or a reason to be concerned regarding its financial reporting policies? (Only a

short answer is required here – up to 10 lines.)