University of Mississippi eGrove Honors College (Sally McDonnell Barksdale Honors Theses Honors College) Spring 5-9-2020 An Analysis of Accounting Concepts Through a Comprehensive Series of Case Studies Colin Baker Follow this and additional works at: https://egrove.olemiss.edu/hon_thesis Part of the Accounting Commons Recommended Citation Baker, Colin, "An Analysis of Accounting Concepts Through a Comprehensive Series of Case Studies" (2020). Honors Theses. 1311. https://egrove.olemiss.edu/hon_thesis/1311 This Undergraduate Thesis is brought to you for free and open access by the Honors College (Sally McDonnell Barksdale Honors College) at eGrove. It has been accepted for inclusion in Honors Theses by an authorized administrator of eGrove. For more information, please contact [email protected]. AN ANALYSIS OF ACCOUNTING CONCEPTS THROUGH A COMPREHENSIVE SERIES OF CASE STUDIES Colin Montgomery Baker Oxford, May 2020 A thesis submitted to the faculty of The University of Mississippi in partial fulfillment of the requirements of the Sally McDonnell Barksdale Honors College. Approved By Advisor: Dr. Victoria Dickinson Reader: Dean W. Mark Wilder © 2020 Colin Montgomery Baker ALL RIGHTS RESERVED ii ABSTRACT This thesis is a compilation of 10 case studies completed under the direction of Dr. Victoria Dickinson during the ACCY 420 course over two semesters to satisfy the requirements of the Sally McDonnell Barksdale Honors College. Each case guides the study of different accounting standards. These include topics such as contingent liabilities, retirement obligations, non-GAAP financial reporting, financial statement analysis, and more. The case topics often coincided with subjects that were being covered in intermediate, audit, and tax accounting. These cases provided an opportunity to learn how to do independent accounting research in FASB codification. Each case exposed me to a more in-depth look at the topic than I had previously had in other classes. Creating the thesis significantly benefited my academic career and prepared me for a professional career. iii TABLE OF CONTENTS CASE ONE: FINANCIAL STATEMENT ANALYSIS OF STARBUCKS CORPORATION ..................................................................................................................... 5 CASE TWO: CONTINGENT LIABILITIES RELATED TO BP OIL SPILL ................. 13 CASE THREE: EQUITY METHOD AND JOINT VENTURE ACCOUNTING ............ 16 CASE FOUR: JOHNSON & JOHNSON RETIREMENT OBLIGATIONS .................... 22 CASE FIVE: BALANCE SHEET APPROACH VS INCOME STATEMENT APPROACH ........................................................................................................................... 28 CASE SIX: GOOGLE’S FINANCIAL STATEMENTS WITH INFORMATION ENVIRONMENT .................................................................................................................. 37 CASE SEVEN: CITY SELECTION .................................................................................... 42 CASE EIGHT: BREXIT ........................................................................................................ 52 CASE NINE: ANALYSIS OF FEDEX ................................................................................ 58 CASE TEN: ECONOMIC INEQUALITY .......................................................................... 64 WORKS CITED ..................................................................................................................... 68 Honor Code............................................................................................................................. 72 iv CASE ONE: FINANCIAL STATEMENT ANALYSIS OF STARBUCKS CORPORATION 5 Introduction The purpose of the case is to practice evaluating and interpreting a set of financial statements with significant implications detailed in the statements’ footnotes. Common- size financial statements are used to increase the ease of comparison between different accounting periods. Concepts a) Starbucks primarily makes money through brick-and-mortar stores in many different countries. Starbucks sells merchandise, food, and drinks in the stores. The firm focuses on cost leadership and convenience to sell its products through its high number of stores. b) Income statements, balance sheets, cash flow statements, and statements of stockholders’ equity are commonly prepared for external reporting. However, Starbucks Corporation prepares a consolidated statement of earnings, consolidated statement of comprehensive income, consolidated balance sheet, and consolidated statement of cash flows. Starbucks label these statements as consolidated because they include wholly owned subsidiaries and controlled investees. c) Publicly traded corporations will always prepare financial statements periodically as they are required by the Securities and Exchange Commission to do so. d) Company management is responsible for financial statements, but external auditors examine the financial statements prepared to determine if they are accurate. The auditor will certify that the financial statements fairly represent the position of the firm for the period. Users of the financial statements include potential investors and creditors to the 6 firm. These users will be interested in using various financial ratios to determine the financial strength of the firm moving forward. e) Deloitte & Touche LLP audited Starbucks Corporation’s financial statements in 2013. The opinion statements are saying that Deloitte & Touche LLP has determined that the financial statements fairly represent the financial position of the firm and that effective internal control of Starbucks Corporation has been maintained has been maintained for the year ending September 29, 2013. Financial statements often take a few months after the year-end to prepare, but must be available in a timely manner to be useful for users of the statements. 7 Analysis f) Figure 1-1: 8 Figure 1-2: 9 g) ii) Starbucks Corporation’s major assets include cash and cash equivalents, inventories, plant assets, deferred income taxes, and goodwill. Short-term assets account for 47.5 percent of total assets while long-term assets account for 52.5 percent. This seems appropriate for Starbucks because it is a company primarily using brick-and-mortar stores with expensive equipment. iii) Intangible assets are assets that are not physical. Goodwill arises in an acquisition when purchase price of a company exceeds the fair value of the acquired company’s total assets. Starbucks likely has intangible assets such as licenses, patents, franchises, goodwill, copyrights, or trade secrets. iv) Starbucks is financed primarily through their retained earnings from growth in revenues as well as through outside investors purchasing common stock. 22.5 percent of total financing comes from non-owners in the form of long-term debt. h) i) In company-owned stores, Starbucks uses cash-basis accounting. For sales to licensed stores, revenue is recognized upon shipment. Gift cards sales are recognized when redeemed or when likelihood of redemption, based on historical data, deems redemption probability to be remote. Challenges in measuring revenue arise from the many different sources of revenue and the different recognition policies in place for the various sources. Management will need to 10 use judgement in deciding when to recognize revenue as some of the recognition policies for licensed stores are not extremely clear. ii) Starbucks’ major expenses in 2013 included operating expenses, general & administrative expenses, and litigation charges as shown in Figure 1-1. iii) Litigation charges were added to the Starbucks cost structure in 2013 and accounted for 18.7 percent of net revenue iv) Starbucks recorded the litigation charge as an operating expense because it is not recurring each year. General and administrative expenses are incurred every year. v) The company was not profitable in 2013 as their operating expenses exceeded their revenues as shown in Figure 1-1. However, the company did report a net income rather than a net loss because of negative tax paid by the government. In 2012, Starbucks was extremely profitable with revenues far exceeding expenses. i) i) Starbucks had net earnings of $8.8 million, while it had net cash provided by operating activities of $2.9083 billion. Calculation of net earnings comes from subtracting all expenses from revenues for a given year. Cash provided by operating activities adds back non-cash expenses and subtracts non-cash income for a year to find exactly how cash moved in operating activities for the company. ii) Starbucks used cash of $1.152 billion to purchase property, plant, and equipment in the 2013 fiscal year. 11 iii) Starbucks Corporation paid $628.9 million in dividends during the 2013 fiscal year. However, the company declared dividends of $668.6 million for 2013. Starbucks will be left with $39.7 million in dividends payable in the following year. j) GAAP requires company management to make estimates affecting various accounts. Starbucks accounts requiring the use of estimates include, but are not limited to, goodwill, fixed assets, inventories, accounts receivable, investments, and deferred income taxes. Accounts that are likely estimate free include cash and cash equivalents, prepaid expenses, intangible assets other than goodwill, accounts payable, long term debt, common stock, and retained earnings. 12 CASE TWO: CONTINGENT LIABILITIES RELATED TO BP OIL SPILL 13 Introduction The purpose of the case is to gain a deeper understanding