Web Cases

CASE 1-1
Analysis of Contingent Obligation: Bristol-Myers Squibb

INTRODUCTION
In 1992, Bristol-Myers Squibb [BMY], a major U.S. based drug company, reported substantial
litigation against the company by recipients of breast implants manufactured and sold by a subsidiary of the company. In 1993, BMY made a provision for losses expected from such litigation.1 In succeeding years, as the litigation proceeded, the company added to that provision for
loss. Eight years later, as of December 31, 2000, while many of these claims had been settled,
the amount of BMYs ultimate cash outflows remained uncertain. This case illustrates the difficulty in assessing the impact of such litigation on reported income and financial position.
EXHIBIT 1C1-1. BRISTOL-MYERS SQUIBB

Breast Implant Litigation Footnotes
Note 17: Contingencies
The company is a defendant in a substantial number of actions filed in various U.S. federal and state
courts and in certain Canadian provincial courts by recipients of two types of breast implants, formerly
manufactured and sold by a subsidiary of the company, alleging damages for personal injuries of various types. Certain of these cases are class actions, some of which seek to allege claims on behalf of all
breast implant recipients. All federal court actions have been consolidated for pre-trial proceedings in
federal District Court in Birmingham, Alabama. In the case of Pamela Jean Johnson v. Medical Engineering Corporation, tried in state Court in Harris County, Texas, a jury on December 23, 1992
awarded plaintiff compensatory and punitive damages totaling $25 million. Absent settlement, the
companys subsidiary will appeal this verdict.
Source: Bristol-Myers Squibb Annual Report, December 31, 1992
Note 17 Litigation
Breast Implant
The Company, together with its subsidiary, Medical Engineering Corporation (MEC), and certain other
companies, has been named as a defendant in a number of claims and lawsuits alleging damages for personal injuries of various types resulting from polyurethane-covered breast implants and smooth-walled
breast implants formerly manufactured by MEC or a related company. Of the more than 90,000 claims
or potential claims against the Company in direct lawsuits or through registration in the nationwide
class action settlement approved by the Federal District Court in Birmingham, Alabama (the Revised
Settlement), most have been dealt with through the Revised Settlement, other settlements, or trial.
In the fourth quarter of 1993, the Company recorded a charge of $500 million before taxes ($310
million after taxes) in respect of breast implant cases. The charge consisted of $1.5 billion for potential
liabilities and expenses, offset by $1.0 billion of expected insurance proceeds. In the fourth quarters of
1994 and 1995, the Company recorded additional special charges of $750 million before taxes ($488
million after taxes) and $950 million before taxes ($590 million after taxes), respectively, related to
breast implant product liability claims. In the fourth quarter of 1998, the Company recorded an additional special charge to earnings in the amount of $800 million before taxes and increased its insurance
receivable in the amount of $100 million, resulting in a net charge to earnings of $433 million after
taxes in respect to breast implant product liability claims. . . . At December 31, 2000, $186 million was
included in current liabilities for breast implant product liability claims.
Source: Bristol-Myers Squibb Annual Report, December 31, 2000
As an offset to the loss provisions for the company also provided estimates for amounts recoverable from insurance.
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CASE OBJECTIVES
CASE OBJECTIVES:
1. Discuss the value to financial analysts of the initial disclosures in BMYs 1992 financial
statement footnotes.
2. Examine the impact on BMYs financial statements and ratios of the 1993 loss provision
and additional loss provisions in following years.
3. Consider the impact on BMYs financial statements and ratios of alternative financial reporting (timing and measurement) of the loss.
Exhibit 1C1-1 contains excerpts from the Annual Reports of Bristol-Myers Squibb for the years
1992 and 2000. These extracts provide a review of the firms disclosures on breast implant litigation. Exhibit 1C1-2 contains data, extracted from annual reports for the years 1993 through
2000, regarding the income statement and balance sheet consequences of the accounting for
this litigation.
Required:
1. The firm did not record a liability for the breast implant litigation for the year ended December 31, 1992. Discuss the usefulness of the footnote disclosure in 1992.
2. The firm recorded a special charge and related liability in the fourth quarters of 1993,
1994, 1995, and 1998. The 1993 charge was offset by $1.0 billion of expected insurance proceeds; the 1998 charge was offset by $100 million of expected insurance recovery. The firm engaged in litigation with some of its insurers regarding the extent of
insurance coverage for these losses. Describe the impact of this offset on the income
statement and the balance sheet.
3. Estimate the actual cash inflows and outflows related to this litigation for the years 1993
through 2000, using the income statement and balance sheet information provided.
4. Restate reported earnings for the years 1993 through 2000 assuming that Bristol-Myers
had recorded an expense for each year equal to the (net of insurance recovery) cash outflow for that year. [Use a marginal tax rate of 35% for each year.]
EXHIBIT 1C1-2. BRISTOL-MYERS SQUIBB

Selected Financial Statement Data
Years Ended December 31
($ in millions)
Income Statement
1992
1993
1994
1995
1996
1997
$1,500
(1,000)
$ 500
310
$ 750
$1,5
$ 750
488
$ 950
$1,5
$ 950
590
$1,696
$1,542
$1,517
$2,484
$2,744
$1,000
$ 968
$ 959
$ 853
100
$1,370
$1,470
635
$1,201
$1,836
700
$1,645
$2,345
800
$1,031
$1,831
1998
1999
2000
$2,750
$3,789
$4,096
$ 619
$ 523
$ 468
$ 262
865
$1,171
$1,036
877
$1,244
$1,121
287
$3,167
$ 354
186
$1,1
$ 186
Breast Implant Litigation

Special charge: gross
(Expected insurance recovery)
Net charge (pretax)
Net charge (after-tax)
Net earnings*
$1,378
$ 800
$1(100)
$ 700
433
*Continuing operations, using restated data from 2000 annual report
Balance Sheet
Non-Current Assets:
Insurance recoverable
Product Liability:
Current portion
Non-current portion
Total
Source: Bristol-Myers Squibb Annual Reports, 19922000
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CASE 1-1
ANALYSIS OF CONTINGENT OBLIGATION: BRISTOL-MYERS SQUIBB
5. Discuss the effect of the restatement in part 4 on the level and trend of BMY earnings
over the 1992 to 2000 time period.
6. Discuss the effect of the restatement in part 4 on Bristol-Myers reported return on equity
(ROE) for the years 1993 through 2000. [Hint: consider the effect of the restatement on
stockholders equity as well as income.]
7. Based on information available at December 31, 2000, describe how to compute the
charge that Bristol-Myers should have recorded in December 31, 1992. Describe the impact of that charge on BMY earnings and ROE in 1992 and subsequent years.
8. Based on your answers to parts 1 through 7, discuss the advantages and disadvantages to
the company of recording expense equal to
(i) The actual cash flows estimated in part 3
(ii) The charge described in part 7
rather than the special charges actually recorded.
CASE 2-1
Revenue and Expense RecognitionOrthodontic Centers of America
CASE OBJECTIVES
The objective of this case is to evaluate the revenue and expense recognition methods used by
the company.
INTRODUCTION
The following information was extracted from the 1999 and 2000 annual reports of Orthodontic
Centers of America [OCA].
The company provides practice management services to orthodontic practices in the
United States. OCA acquires and develops orthodontic centers and manages the business operations and marketing aspects of affiliated orthodontic practices. At December 31, 2000, there
were 592 orthodontic centers, of which the company developed 306 and acquired 361 (75
were consolidated into another center).
The affiliated orthodontists control the orthodontic practices, determine which personnel,
including orthodontic assistants, to hire or terminate, and set their own standards of practice in
order to promote quality orthodontic care.
A typical patient receives an initial consultation and preliminary procedures (teeth impressions, x-rays, and the placing of spacers between the teeth for braces) in advance of the next appointment. The patient signs a contract for treatment in the event the orthodontist recommends
orthodontic treatment. Generally, braces are applied two weeks later and subsequent adjustments to the braces are made every four to eight weeks.
The contract specifies the terms and the length of the treatment as well as the total fees. The
average contract length is 26 months. No initial down payment is required; the patient makes
equal monthly payments followed by a final payment on completion of the treatment.
OCA provides the following services to its affiliates:
1. Staffing
2. Supplies and inventory
3. Computer and management information services
4. Scheduling, billing, and accounting services
An unrelated financial institution finances operating losses and capital improvements for newly
developed orthodontic centers; OCA guarantees the related debt.
1999 REVENUE RECOGNITION

The Company earns its revenue from long-term service or consulting agreements with affiliated orthodontists. Through December 31, 1999 OCA recognized monthly fees equal to approximately:
24% of the aggregate amount of all new patient contracts entered into during that particular month, plus
The balance of contract amounts allocated equally over the remaining term of the contract.
Gross amounts are reduced by the portion of contract amounts expected to be retained by
the orthodontist.
OCA recognizes operating expenses as incurred.
Required:
1. OCA believes that at least 24% of its services relate to the first month of the patient
contracts. Given the services provide by OCA and the terms of the service and consulting agreements:
Evaluate the revenue recognition method used by OCA.
Propose and justify a more appropriate revenue recognition method.
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CASE 2-1
REVENUE AND EXPENSE RECOGNITIONORTHODONTIC CENTERS OF AMERICA
2. Estimate OCAs average contract balance for new patients in 1999, using the operating
data in Exhibit 2C-1.
3. Estimate the first year revenue that OCA recognizes from a new patient contract, assuming that OCAs share of the contract amount is $3,000, the contract length is 26
months, and the contract is signed on
(i) January 1 of the first year
(ii) July 1 of the first year
(iii) December 1 of the first year
4. Estimate the second year revenue that OCA recognizes from a new patient contract,
under the same assumptions as Question 3, for each of the three signing dates.
5. Explain why, using your answers to Questions 3 and 4, OCA must expand its operations rapidly to maintain revenue growth.
2000 Revenue Recognition
Effective January 1, 2000, OCA changed its revenue recognition method citing SEC Staff Accounting Bulletin No. 101 (see page 45 of text). OCA now recognizes net revenue using a
straight-line allocation of patient contract revenue over the duration of the patient contract (typically 26 months). The company reported that
The cumulative effect of this accounting change, calculated as of January 1, 2000, was $50.6 million, net of income tax benefit of $30.6 million. The effect of this accounting change in 2000 was to
reduce revenue by $26.3 million. In 2000, the Company recognized revenue of $57.3 million that
was included in the cumulative effect adjustment.1
The company also reported the pro forma effect of the accounting change on net income, assuming it had been in effect in prior years. Results for those years were not, however, restated.
Exhibit 2C-1 contains operating and income statement data for OCA for the years 1997
through 2000. The exhibit also shows reported balance sheet data for 1998 through 2000,
and restated data for 1999 (see Question 15). Use the exhibit to answer the questions that
follow.
Required:
6. Redo Questions 3 and 4, using the revenue recognition method that OCA adopted in
2000.
7. Compare the first and second year revenue recognized under the 2000 and 1999 methods. Note: use an average of the three signing assumptions.
8. The accounting change had two effects on year 2000 revenue:
Revenue recognized from new patients was reduced.
Revenue from patients signed in prior years, included in the cumulative effect adjustment, was recognized in 2000.
(i) From the companys disclosure of the effect of the accounting change, compute
each of these effects.
(ii) Use your answer to Question 7 to estimate the second of these effects.
9. Compute OCAs 2000 revenue and net income assuming that it had not changed its
revenue recognition policy.
10. Explain why OCAs revenue recognition policy has a disproportionate effect on net
income.
11. Discuss the effect of the accounting change on your answer to Question 5.
12. Compute the annual percent changes in each of the following statistics for 1997 to
2000, and discuss their trend and their implications for future revenue growth:
Number of orthodontic centers
Total case starts
Number of patients under treatment
13. Describe the effect of the accounting change on OCAs receivables.
Source: footnote 2 to 2000 financial statements.
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1999 REVENUE RECOGNITION
EXHIBIT 2C-1. ORTHODONTIC CENTERS OF AMERICA

Reported Operating and Financial Data
Operating Data
Number of orthodontic centers
Total case starts
Number of patients under treatment
New patient contract balances ($ millions)
1997
1998
360
70,611
130,000
469
95,377
195,000
Income Statement
1999
537
126,307
267,965
$ 369.1
2000
592
160,639
343,373
$ 494.1
(Amounts in $ Thousands, Except Per Share Data)

Net revenue
Operating expense
Operating profit
Net interest income (expense)
Pretax income
Income tax expense
Net income*
1997
1998
1999
2000
$117,326
$(81,368)
$ 35,958
$331,143
$ 37,101
$ (14,469)
$ 22,632
$171,298
(117,012)
$ 54,286
$444,280
$ 54,566
$ (20,753)
$ 33,813
$226,290
(149,366)
$ 76,924
$1 (2,204)
$ 74,720
$ (28,206)
$ 46,514
$268,836
(188,834)
$80,002
$8 (3,731)
$ 76,271
$ (28,549)
$ 47,722
Diluted earnings per share
0.50
0.70
0.96
0.96
Provision for bad debt expense
1,851
2,295
2,079
373
*Before cumulative effect of accounting changes
Pro Forma for 2000 Accounting Change

Net income
Diluted earnings per share
$ 12,013
$
0.26
Balance Sheet Data
$ 22,276
$
0.46
$ 32,326
$
0.66
n/a
n/a
December 31
(Amounts in $ Thousands)
1998
1999
Reported
Patient receivables1
Unbilled patient receivables2
Service fees receivable3
Total assets
Patient prepayments
Deferred revenue
Total debt
Total liabilities
Stockholders equity
2000
Restated
$ 20,163
46,314
$ 25,976
65,793
296,798
367,022
$ 87,563
362,816
$ 35,350
367,947
4,326
4,206
20,055
65,639
231,159
50,632
88,495
278,527
50,632
84,289
278,527
2,516
58,575
80,751
287,196
Net of allowance for uncollectibles of $5,356 in 1998 and $6,403 in 1999

3
2
14. Compute each of the following statistics for 1997 to 2000. Discuss their trend, their impact on reported income, and their implications for future revenue and income growth.
Discuss the effect of the accounting change on the 2000 statistics.
(i) Revenue, expense, and operating profit per patient under contract
(ii) Revenue, expense, and operating profit per center
15. In 2000, OCA restated its 1999 balance sheet to aggregate billed and unbilled patient receivables (as service fee receivables). It also reduced that amount by patient prepayments,
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CASE 2-1
REVENUE AND EXPENSE RECOGNITIONORTHODONTIC CENTERS OF AMERICA
previously shown as a current liability. Compute the ratio of the allowance for uncollectible amounts to gross receivables for:
Billed and unbilled patient receivables for 1998 and 1999
Service fees receivable for 1999 (restated) and 2000.
(i) Discuss whether the differences between the ratios for billed and unbilled receivables accord with the nature of the receivables.
(ii) Discuss the trend in the allowance ratios over the 1998 to 2000 period.
(iii) Explain why the aggregation is a loss of information useful for financial analysis.
16. Compare the trend of earnings per share for 1997 to 2000 using the pro forma data
with the trend as originally reported. Explain which time series better represents the operating results over that time period.
17. Discuss two reasons why the time series that is your answer to question 16 may not be
a reliable basis for forecasting future results.
CASE 3-1
Cash Flow AnalysisOrthodontic Centers of America [OCA]
This case is a continuation of Case 2C-1, which provides information about the business conducted by OCA and describes the revenue recognition method used by OCA (both before and
after the January 2000 accounting change). Use the data provided in Case 2C-1 and Exhibit 3C-1
to answer the following questions.
Required:
1. Calculate the actual cash collections for the years 19982000.
2. Compare the cash collection amounts computed in question 1 with revenues
(i) Reported for each year
(ii) Calculated using the pre-January 1, 2000 revenue recognition method (see Case 2-1,
question 9).
(iii) Calculated using the post-January 1, 2000 revenue recognition method. (Hint: To
adjust reported 1998 and 1999 revenue, use the pro forma earnings provided and
assume a 35% tax rate.)
3. Discuss how the answers to question 2 provide insight as to the appropriate revenue
recognition method.
4. Analyze the trends in the companys cash from operations, cash for investing, free cash
flows, and cash from financing.
Exhibit 3C-1 also provides information as to how the company acquires new affiliated orthodontists.
5. (a) Explain how these acquisition costs affect the companys cash from operations, cash
for investing, and free cash flows. State where the remaining acquisition costs are reported in the cash flow statement.
(b) Explain how the reporting of the cash flows associated with the acquisition of affiliated practices differs from the reporting of cash flows associated with newly developed practices.
6. Describe the effect of the companys treatment of the affiliated practice acquisition costs
on the analysis of the companys cash flows. Suggest an alternative approach to cash
flow analysis and redo question 4 after making the required adjustments to the cash flow
statement for the acquisition costs.
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CASE 3-1
CASH FLOW ANALYSISORTHODONTIC CENTERS OF AMERICA [OCA]
EXHIBIT 3C-1. ORTHODONTIC CENTERS OF AMERICA

Financial Statement Disclosures
Consolidated Statements of Cash Flows
($ in thousands)
OPERATING ACTIVITIES
Net income (loss)
Adjustments
Provision for bad debt expense
Depreciation and amortization
Deferred income taxes
Cumulative effect of changes in accounting principles
Changes in operating assets and liabilities:
Service fee receivables
Supplies inventory
Prepaid expenses and other
Advances to/amounts payable to orthodontic entities
Accounts payable and other current liabilities
Cash from operations
2000
1999
$ (2,854)
$ 45,836
373
15,175
(7,792)
50,576
2,079
12,238
1,273
678
1998
$ 33,813
2,295
9,124
(2,767)
(13,549)
889
(2,309)
(8,233)
$(17,368
$ 39,644
(27,491)
(2,305)
(1,342)
(2,420)
$1(5,199)
$ 23,347
(22,733)
(2,663)
228
(1,756)
$(26,568
$ 22,109
(20,271)
(16)
(28,246)
$(48,5
$(48,533)
(22,520)
204
(17,178)
(3,951)
$$(48,370
$(43,075)
(17,638)
19,674
(42,216)
(4,906)
$(41,927
$(43,159)
Repayment of notes payable to affiliated orthodontists and long-term debt

Proceeds from long-term debt
Repayment of loans from key employee program
Issuance of common stock
Cash provided by financing activities
(6,530)
7,483
2,632
$(14,299
$ 7,884
(6,742)
30,577
$(23,114
$ 23,949
(7,864)
20,055
$(43,595
$ 12,786
Foreign currency translation adjustment

Change in cash and cash equivalents
Cash and cash equivalents: beginning of year
end of year
$11,(127)
$ (1,132)
$(15,822
$ 4,690
$(48,5
$ 4,221
$(11,601
$ 5,822
$(48,5
$ (8,264)
$(19,865
$ 1,601
$ 13,609
INVESTING ACTIVITIES
Purchases of property and equipment
Proceeds from (sales of ) available-for-sale investments
Intangible assets acquired
Advances to orthodontic entities
Payments from orthodontic entities
Cash used in investing activities
FINANCING ACTIVITIES
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Notes payable and common stock issued to obtain Service Agreements
5,974
4,512
Transactions with Orthodontic Entities

The following table summarizes the Companys finalized agreements with orthodontic entities to obtain Service Agreements and to acquire other assets for the years ended December 31, 2000, 1999 and 1998:
2000
1999
1998
Total
Acquisition
Costs
Notes Payable
Issued
Remainder
(Primarily
Cash)
Share Value
(at average
cost)
Common
Stock Shares
Issued
$34,220,000
21,700,000
56,900,000
$1,255,000
3,600,000
8,700,000
$28,246,000
17,190,000
43,994,000
$4,719,000
910,000
4,206,000
227,000
80,000
253,000
CASH FLOW ANALYSISORTHODONTIC CENTERS OF AMERICA [OCA]
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EXHIBIT 3C-1 (continued)

At December 31, 2000 and 1999, advances to orthodontic entities totaled $16,701,000 and $20,530,000, respectively. Of these amounts,
approximately $1,208,000 and $5,045,000 related to orthodontic entities that generated operating losses during the three months ended
December 31, 2000 and 1999, respectively. At December 31, 2000 and 1999, advances to orthodontic entities in international locations
totaled $6,196,000 and $1,413,000, respectively.
Intangible Assets
The Company affiliates with a practicing orthodontist by acquiring substantially all of the non-professional assets of the orthodontists
practice, either directly or indirectly through a stock purchase, and entering into a Service Agreement with the orthodontist. The terms of
the Service Agreements range from 20 to 40 years, with most ranging from 20 to 25 years. The acquired assets generally consist of
equipment, furniture, fixtures and leasehold interests. The Company records these acquired tangible assets at their fair value as of the
date of acquisition, and depreciates or amortizes the acquired assets using the straight-line method over their useful lives. The remainder
of the purchase price is allocated to an intangible asset, which represents the costs of obtaining the Service Agreement, pursuant to
which the Company obtains the exclusive right to provide business operations, financial, marketing and administrative services to the orthodontist during the term of the Service Agreement. In the event the Service Agreement is terminated, the related orthodontic entity is
generally required to purchase all of the related assets, including the unamortized portion of intangible assets, at the current book value.
Source: 2000 Annual Report
CASE 4-1
Integrated Analysis of Pfizer, Takeda Chemical, and Roche
INTRODUCTION
Ratio analysis should not be simply a mechanical exercise but a means to an end. It can be used
in two different ways. The first method is to compute a number of ratios and then look for
changes over time or differences among companies. Such analysis leads to an understanding of
the level and trend of profitability as measured by return on equity (ROE). The second method is
to start with ROE and then, by analyzing the components that comprise this measure, explain
changes over time or differences among companies.
CASE OBJECTIVES
1. Compute the financial statement ratios for two companies in the same industry, using
the following categories: activity, liquidity, solvency, and profitability.
2. Discuss the factors that limit the usefulness of such comparisons.
3. Show how ratios can be aggregated to explain differences in ROE among companies.
4. Show how top-down ratio analysis can be used to explain changes in ROE for a company over time as well as differences between companies.
Takeda operates in the same industry as Pfizer and its 1999 financial statements are contained in
the CD (and web site) accompanying the text. Note that the Takeda statements are prepared in
Japanese yen and in accordance with Japanese GAAP.
Required
1. For Takeda, compute ratios for 1999 in the following categories, using the Pfizer exhibits
cited as a guide:
Activity (Exhibit 4-4)
Liquidity (Exhibit 4-6)
Solvency (Exhibit 4-8)
Profitability (Exhibit 4-10)
2. Using your answers to Question 1 and the corresponding Pfizer data, compare the ratios
of the two companies in each of these categories. Discuss factors that limit the usefulness of this comparison and additional data that would be needed to improve it.
3. Prepare an integrated ratio analysis of Takeda, using Exhibits 4-12 and 4-14 as a guide.
4. Compare the 1999 ROE of Pfizer and Takeda, and determine the key ratios that explain
the difference in ROE. Discuss other factors that might explain the differences in ROE
and any additional data needed to adjust for these factors.
Roche also operates in the same industry as Pfizer and Takeda. Its year 2000 annual report is
available on the CD (and web site) accompanying the text. Its financial statements are denominated in Swiss francs (CHF) and prepared according to IAS GAAP.
5. Using the top-down approach suggested by the discussion relating to Exhibit 4-13, determine the key ratios that explain the
(i) changes in Roches ROE from 1999 to 2000
(ii) difference between the 1999 ROE for Pfizer and Roche
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CASE 6-1
Inventory Analysis of Nucor
INTRODUCTION
Nucor [NUE] is one of the largest steel companies in the United States. Exhibit 6C-1 contains financial data for the five years ended December 31, 1999. Nucor has used the LIFO method for
all inventories during the entire time period.
CASE OBJECTIVES
The objectives of this case are to
1. Show the impact of Nucors use of the LIFO inventory method on its:
Balance sheet
Income statement
Financial ratios
2. Discuss the advantages and disadvantages of use of the LIFO method.
3. Discuss the relationship between price trends and use of the LIFO method.
The following questions should be answered using the data provided in Exhibit 6C-1. Assume a
marginal tax rate of 35% for all years.
1. Calculate gross margin (both level and as a percent of sales) under both the LIFO and
FIFO methods for the years 19951999.
EXHIBIT 6C-1. Nucor
Selected Financial Data
Data in $millions
1994
1995
1996
1997
1998
1999
Sales
Cost of products sold
Pretax
Net income
$3,462,046
2,900,168
432,335
274,535
$3,647,030
3,139,158
387,769
248,169
$4,184,498
3,578,941
460,182
294,482
$4,151,232
3,591,783
415,309
263,709
$4,009,346
3,480,479
379,189
244,589
Earnings per share

Tax rate
Income Statement
3.14
35%
2.83
35%
3.35
35%
3.00
35%
2.80
35%
Balance Sheet
LIFO inventory
LIFO reserve
$ 243,027
81,662
$ 306,773
93,932
$ 385,799
73,901
$ 397,048
100,576
$ 435,885
5,121
$ 464,984
28,590
830,741
447,136
828,381
465,653
1,125,508
524,454
1,129,467
486,897
1,538,509
531,031
Current assets
Current liabilities
Stockholders equity
Per share
1,122,610
12.85
1,382,112
15.78
1,609,290
18.33
1,876,426
21.32
2,072,522
23.73
2,262,248
25.96
Statement of Cash Flows

$ 447,160
$ 450,611
$ 577,326
$ 641,899
$ 604,834
Source: Nucor Annual Reports, 19941999
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CASE 6-1
INVENTORY ANALYSIS OF NUCOR
2. Discuss the differences in the level, trend, and variability of gross margins under the
two methods.
3. Calculate net income assuming Nucor had used the FIFO method of reporting for
19951999 and discuss differences in the level, growth rate, and variability of net income under the two methods.
4. Calculate stockholders equity per share assuming Nucor had used the FIFO method of
reporting for 19951999. Compare your results to reported equity and discuss the difference in level and growth rate.
5. Calculate Nucors cash from operations assuming Nucor had used the FIFO method of
reporting for 19951999. Compare your results to reported cash from operations and
discuss the difference in level and growth rate.
6. Calculate the following ratios for Nucor, using both reported data and assuming it had
used the FIFO method of reporting, for 19951999:
Current ratio
Return on (average) equity
Discuss the effect of using LIFO on the level and variability of both ratios.
7. Calculate Nucors inventory turnover ratios for 19951999, using:
(i) LIFO data
(ii) FIFO data
(iii) Current cost data
Discuss the differences among these three turnover ratios and select the method that
provides the best measure of economic turnover. Discuss the trend in Nucors inventory turnover over the 19951999 period. Discuss factors that might account for the
variability of reported turnover.
8. Using the results of Questions 17 and the data in Exhibit 6C1-1, discuss the advantages
and disadvantages to Nucor of use of the LIFO method over the 19951999 time period.
9. Nucors LIFO reserve at December 31, 1999 was less than 6% of gross inventory (FIFO
basis) compared with a peak of more than 27% at December 31, 1990. There have
been no LIFO liquidations during this time period.
(a) What information does this decline provide about the price trend in steel scrap
(Nucors major raw material input)?
(b) Discuss how this decline affects the advantages and disadvantages to Nucor of
using the LIFO method.
10. If Nucor were considering switching from LIFO to FIFO, what date would it have chosen to make the change? Why?
11. If Nucor did switch from LIFO to FIFO, what information would that convey about the
companys price expectations? Explain.
12. Steel Dynamics [STLD], a Nucor competitor, uses the FIFO inventory method. Selected
data for 1997 through 1999 follow ($ in thousands):
Sales
Cost-of-goods-sold
Net Income
Ending Inventory
Ending Equity
1997
1998
1999
$ 60,163
337,595
$514,786
428,978
31,684
126,706
351,065
$618,821
487,629
39,430
106,742
391,370
(a) Using reported data, compute each of the following ratios for 1998 and 1999 for
Steel Dynamics:
Gross profit margin
Return on equity
Inventory turnover ratio
(b) Assume that Steel Dynamics used the LIFO inventory method. Redo (a) using adjusted ratios for Steel Dynamics. For each ratio, use the method(s) you deem most
appropriate and justify your choice.
CASE OBJECTIVES
W77
(c) Explain why the adjustments improve the apparent performance of Steel Dynamics
for 1998 but reduce it for 1999.
(d) Explain why the adjusted ratios provide a more useful comparison for the two
years.
(e) Explain why the adjusted ratios provide a more useful comparison between Steel
Dynamics and Nucor for the two years.
CASE 7-1
Analysis of Software Capitalization: International Business Machines
INTRODUCTION
The capitalization of computer software costs affects reported net income and stockholders equity in each accounting period. Because capitalized amounts must be amortized, the capitalization decision affects future accounting periods as well. In addition, while capitalization does not
affect cash flow, it does change the allocation between cash from operations and cash for investment. In this case we explore these issues using International Business Machines [IBM], the
worlds largest computer manufacturer.
CASE OBJECTIVES:
1. Compute the effect of IBMs capitalization of software expenditures on its reported balance sheet, income, cash flows, and financial ratios.
2. Show how changes in IBMs capitalization affected the level and trend of measures of
income and cash flow.
3. Show how capitalization obscures trends in total spending on software and on research
and development.
4. Show how capitalization affects segment profitability measures.
5. Discuss the possible effect of changes in corporate profitability on accounting policies.
Exhibit 7C1-1 contains corporate financial data, software segment data, and data regarding the
capitalization of computer software costs by IBM over the period 1992 2001. IBM capitalized
a portion of computer software costs as permitted by accounting standards discussed in the
chapter.
Use the information provided to answer the following questions.
1. Compute the effect on IBMs net income of software capitalization for the years 1992
2001. Assume a 35% tax rate.
2. Compute the effect of software capitalization on IBMs
(i) Cash from operations
(ii) Cash for investment
for the years 19922001. Discuss the effect of capitalization on the trend of both cash
flow measures.
3. Compute IBMs total spending on computer software (whether expensed or capitalized)
over the period 1992 2001. Compute the percentage of spending that was capitalized each year.
4. Compute the year-to-year percentage change in IBMs software segment external revenues for 19922001. Discuss the trend over that time period. Note that IBM redefined
that segment in 1996 so that 1996 2001 revenues are not comparable to 19921995
amounts.
5. Compute the gross profit and gross profit percentage for IBMs external software revenues
for 1992 2001. Discuss the trend in segment profitability over that 19922001 period.
6. IBM started disclosing total software revenues in 1996. Compute the pretax profit margin for IBMs total software revenues for 19962001. Discuss the trend in segment profitability over that time period.
7. Compute the return on assets for IBMs software segment over the 1996 2001 period.
Discuss the trend in segment ROA over that period. Explain how the level and trend of
segment ROA are affected by IBMs accounting policies on R&D. Hint: consider the effect on ROA of capitalizing either all software-related R & D or none.
8. Discuss how the capitalization of software affects ROA in
(i) Years with large capitalized amounts
(ii) Years with small capitalized amounts
W78
W79
CASE OBJECTIVES
EXHIBIT 7C1-1
International Business Machines
Amounts in $millions
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
$75,947
5,429
$78,508
6,093
$81,667
6,328
$87,548
7,712
$88,396
8,093
$85,866
7,723
Corporate Financial Data

Revenue
Net income*
$64,523 $62,716
(6,865) (7,987)
$64,052 $71,940
3,021
4,178
*Before accounting changes

Cash for investing
Stockholders equity
6,274
(5,878)
27,624
8,327
(4,202)
19,738
11,793
(3,426)
23,413
10,708
(5,052)
22,423
10,275
(5,723)
21,628
8,865
(6,155)
19,816
9,273
(6,131)
19,433
10,111
(1,669)
20,511
9,274
(4,248)
20,624
14,265
(6,106)
23,614
Total R & D Expense*
6,522
5,558
4,363
4,170
4,654
4,877
5,046
5,273
5,151
5,290
1,840
1,161
1,097
793
1,157
Not comparable to 19962001
$11,103 $10,953 $11,346 $12,657
435
1,726
2,016
111
2,086
111
2,036
9
1,948
1,926
$11,426
$12,593
$12,019
2,946
2,466
2,813
$11,164
$12,671
$11,835
2,785
2,034
2,642
$11,863
$12,749
$12,612
2,260
2,742
2,57
$12,662
$12,767
$13,429
2,240
3,099
2,527
$12,598
$12,828
$13,426
2,283
2,793
2,488
$12,939
$12,981
$13,920
2,265
3,168
3,356
*IPRD included in expense
Software-related R & D
Software Segment
External revenue
Internal revenue
Total revenue
Cost of external revenue
Pretax segment income
Segment assets
3,924
4,310
4,680
4,428
1,466
1,951
2,098
1,647
1,336
983
517
426
482
625
1,752
1,507
1,361
823
295
314
250
464
565
655
Statement of Cash Flows

CFO: Addback to Net Income
Amortization of software
CFI
Investment in software
Source: Data from International Business Machines Annual and 10-K Reports, 19942001
9. Compute IBMs total R&D expenditures (including amounts capitalized) over the period 19922001 and compute total expenditures as a percentage of total corporate revenues. Discuss the trend in that percentage, the possible reasons for that trend, and the
questions you would want to ask IBM management about that trend. Note: IBM reclassified some R&D expenditures in 2001; our data for prior years is not restated.
10. Compute IBMs after-tax profit margin and return on average stockholders equity over
the period 1992 to 2001. [1991 equity was $36,679 million.]
11. The capitalization of software expenditures reflects accounting standards in effect each
year, the nature of software expenditures, and changes in corporate policy. Discuss the
possible effects of each of these three factors on the amount of software capitalization
by IBM over the 19922001 time period. Your answer should incorporate your answers to parts 1 through 10 of this case.
CASE 10-1
Analysis of Debt Capitalization: Read-Rite
INTRODUCTION
Read-Rite [RDRT] is one of the largest manufacturers of magnetic recording heads for computer
disk drives, a highly competitive business characterized by rapid technological change. In August 1997, Read-Rite issued $345 million of convertible subordinated notes. Over the next
three years, the companys operating results and financial condition deteriorated, bringing the
company close to insolvency. Early in 2000, the company offered to exchange new notes for
the old ones. That exchange, accompanied by improved operations, resulted in the retirement
of virtually all of the old notes in exchange for common stock, with beneficial effects on the
companys financial statements.
CASE OBJECTIVES
The objectives of this case are to:
1. Analyze the financial condition of Read-Rite over time.
2. Show the effects of the exchange offer on Read-Rites financial condition.
3. Discuss the economic significance and the financial statement relevance of the recognized gain from the exchange offer.
4. Discuss the significance of the difference between carrying value and market value of debt.
5. Analyze, from the note holder perspective, the decision to accept the note exchange.
In August 1997, Read-Rite issued $345 million of 6.5% subordinated notes, due in September
2004. The notes were convertible into Read-Rite common shares at $40.24 per share. As shown
in Exhibit 10C-1, the company reported substantial losses in 1998 and 1999. As a result, ReadRites auditor opinion at September 30, 1999 had a going concern qualification (Exhibit 1-3).
Because of its large losses, Read-Rite violated the financial covenants of its bank debt facility, which it had drawn down in 1998 and 1999 to fund its cash needs and provide adequate
liquidity. Threatened with default and the possibility of having to file for bankruptcy, Read-Rite
made an exchange offer for the 6.5% notes. For each $1,000 of old notes, holders were offered
$500 of new notes, convertible into Read-Rite common shares at $4.51 per share (15% above
the current stock price). Interest at 10% could be paid in cash or Read-Rite shares, at the companys election. The new notes were due September, 2004.
In March 2000, Read-Rite completed the exchange of $325.2 million of old notes for
$162.6 million of new notes, and sold an additional $61.2 million of new notes for cash. ReadRite wrote off $5 million of unamortized issuance costs of the old notes.
The new notes provided for automatic conversion into common shares if the Read-Rite
share price exceeded $9.02 for a specified time period. When that condition was achieved,
Read-Rite invoked the automatic conversion provision and the notes were converted to common shares in October 2000. The pro forma balance sheet at September 30, 2000 reflects that
conversion as well as the sale of new common shares for $18.9 million cash and $28.8 million
of bank debt repayments. The auditors opinion at September 30, 2000 has no qualification.
Exhibit 10C-1 contains Read-Rite financial data for the four fiscal years ended September
30, 2000.
Use the information provided to answer the following questions.
1. Compute each of the following ratios at December 31, 19972000:
(i) Total debt to equity (both as reported)
(ii) Net debt to equity (both as reported)
(iii) Total debt to equity (both at market)
(iv) Net debt to equity (both at market)
where net debt is total debt less cash and marketable securities and equity is defined as
shareholders equity plus minority interest.
W80
EXHIBIT 10C-1
Read-Rite
Selected Financial Data
Amounts in $millions
Years Ended September 30
Balance Sheet Data
Cash and equivalents
Short-term investments
Other current assets
Total current assets
Property, plant, equipment
Intangible and other assets
Total assets
1997
$ 118.6
179.5
$1,285.2
$ 583.3
672.8
$1,145.4
$1,301.5
1998
1999
2000*
62.4
46.0
$1,172.9
$ 281.3
573.6
$1,124.9
$ 879.8
80.5
145.9
$1,183.2
$ 309.6
457.2
$1,117.7
$ 784.5
54.6
$1,127.6
$ 182.2
285.1
$1,119.9
$ 477.2
$ 12.6
$1,227.5
$ 240.1
345.0
58.9
$1,138.7
$ 682.7
73.1
$1,545.7
$1,301.5
$ 22.5
$1,161.1
$ 183.6
345.0
43.3
$1,132.0
$ 603.9
42.0
$1,233.9
$ 879.8
$ 158.1
$1,132.8
$ 290.9
345.0
16.7
$1,115.8
$ 658.4
41.9
$1,184.2
$ 784.5
$ 11.1
$1,125.3
$ 136.4
19.8
25.4
$1,115.1
$ 186.7
19.3
$1,271.2
$ 477.2
345.0
191.1
182.8
(129.2)
146.3
(284.3)
12.7
(409.1)
$ 808.6
(941.4)
(220.1)
(29.6)
7.1
24.6
$(3131.1
$ (319.7)
$ 716.5
(739.7)
(159.0)
(31.9)
4.1
25.9
$(1128.4
$ (155.7)
$ 555.9
(616.9)
(213.0)
(33.0)
(29.4)
11.1
$(1141.9
$ (283.4)
$1,158.6
$ (124.8)
(70.0)
(29.7)
(106.5)
*Pro forma for debt conversion and related transactions.
Short-term debt
Other current liabilities
Total current liabilities
Convertible debt1
Other long-term debt
Other long-term liabilities
Total liabilities
Minority interest
Stockholders equity2
Total equities
1
Fair value
Includes retained earnings
Income Statement Data

Net sales
Cost of sales
Operating expenses3
Interest expense
Debt conversion expenses
Interest income
Income tax expense
Minority interest
Net income before extrod.item
Gain on debt conversion
Net income
$1,162.0
(923.2)
(119.1)
(15.7)
8.6
(29.3)
(((((((7.1)
$ 76.2
Includes PPE write-downs
Cash Flow Data

Operating activities
Investing activities4
Financing activities
Foreign currency effects
Net cash flow
$ 190.1
(392.8)
235.7
$111,3.3
$ 36.3
(8.8)
(54.4)
7.0
$$$,.1
$ (56.2)
76.2
(200.8)
142.7
$$$,.1
$ 18.1
(67.7)
52.2
(0.6)
$$$,.1
$ (16.1)
(272.8)
(186.2)
(101.0)
(93.6)
Includes capital expenditure
Stock pricehigh
low
year end
Year-end shares (millions)
33.13
15.38
26.81
48.133
26.81
5.50
7.81
48.764
19.69
4.03
4.41
49.675
11.56
1.88
11.25
117.014
Source: Read-Rite data from 19982000 annual reports.
W81
W82
CASE 10-1
ANALYSIS OF DEBT CAPITALIZATION: READ-RITE
2. Discuss the trend in these four ratios over the period 19971999.
3. State and justify which of the ratios computed in (1) best represented the companys financial condition.
4. Justify the auditors decision to give a going concern qualification at September 30,
1999. Your response should include the computation and discussion of Read-Rites:
(i) Gross margin
(ii) Interest coverage ratio
(iii) Cash flow
over the 19971999 period.
5. Discuss three benefits that Read-Rite obtained from the exchange offer. State the cost
to the company of the exchange offer.
6. When the note exchange became effective in 2000, Read-Rite recognized a gain of
$158.6 million. Show how that gain was computed.
7. Discuss whether the $158.6 million gain should have been recognized in fiscal 2000
rather than fiscal 1998 and 1999. Discuss whether, in economic terms, there was any
gain at all.
8. From the note holder perspective, explain one advantage and two disadvantages of the
new notes. Discuss why most note holders accepted the exchange offer. Evaluate that
decision based on subsequent events.
CASE 11-1
Off-Balance-Sheet Financing Techniques for Texaco and Caltex
The objective of this case is to extend the analysis of the off-balance-sheet financing activities of
Texaco begun in Exhibit 11-7 of the text. Specifically the case focuses on Texacos affiliates and
their OBS activities and the adjustments to reported financial statements required to reflect these
activities.
Caltex is a joint venture between Texaco and Chevron [CHV] (another oil multinational);
each partner owns 50%. Exhibit 11C-1 contains the 1999 condensed balance sheet, income
statement, and selected footnotes of Caltex as well as general information, all extracted from
Texacos 1999 10-K report.
Relevant financial information relating to Texaco can be obtained from Texacos 1999 Annual Report (on the website/CD) and from the information provided in Exhibits 11-6 and 11-7 in
the text.
Required:
1. Exhibit 11-7 shows Texacos reported and adjusted debt-to-equity ratios. To extend the
analysis, compute the following ratios on a reported and adjusted basis for 1999:
Return on assets (Use 1999 year end total assets)
Times interest earned
2. (a) Using the Caltex reported balance sheet and income statement (without any adjustments), prepare a capitalization table for Caltex for the year ended December 31,
1999.
(b) Compute the following Caltex ratios for 1999:
Debt-to-equity
Return on assets
Times interest earned
3. (a) Using the footnote data from Exhibit 11C-1, compute the appropriate adjustments to
Caltex debt for its off-balance-sheet obligations.
(b) Using the result of part (a), recompute the ratios in question 2(b).
(c) Discuss the significance of your results.
4. Use the results of Questions 2 and 3 to further adjust Texacos debt and equity, and ratios calculated in Question 1.
5. Describe the information not contained in the Texaco and Caltex financial data that
would help you evaluate the impact of their off-balance-sheet obligations on future cash
flows. (Your discussion should include both financial and operational factors.)
In addition to Caltex, Texacos major affiliates are Equilon Enterprises LLC (44% owned) and
Motiva Enterprises LLC (32.5% owned).1 A description of these affiliates follows.
Equilon was formed and began operations in January 1998 as a joint venture between
Texaco and Shell. Equilon, which is headquartered in Houston, Texas, combines major
elements of Texacos and Shells western and midwestern U.S. refining and marketing
businesses and their nationwide transportation and lubricants businesses. Texaco owns
44% and Shell owns 56% of the company. Equilon refines and markets gasoline and
other petroleum products under both the Texaco and Shell brand names in all or parts of
32 states. Equilon is the seventh largest refining company in the U.S.
(Continued on page W87.)
Equilon and Motiva are limited liability companies (LLC) and do not pay income taxes directly. Taxes are the responsibility of the limited partners. As such, their financial statements do not record a provision for taxes.
W83
EXHIBIT 11C-1. CALTEX GROUP OF COMPANIES

Excerpts from 1999 Financial Statements ($millions)
Condensed Consolidated Income Statement
Year Ended December 31, 1999
Sales and other operating revenue
$14,583
Cost of sales
Selling, general and administrative
Depreciation, depletion, and amortization
Maintenance and repairs
Total expenses
12,775
582
459
$13,154
$13,970
Operating income
613
Income in equity affiliates

Dividends, interest, and other income
Foreign exchange, net
Interest expense
Minority interest
Total other income (deductions)
252
80
(11)
(152)
$1211(2)
$ 167
Income before income taxes

Income taxes
Net income
780
$13,390
$ 390
Condensed Consolidated Balance Sheet
December 31, 1999
Assets
Current assets
Investments and advances
Net property
Other
Total assets
$ 2,705
2,223
5,170
$10,211
$10,309
Liabilities and Equity

Short-term debt
Accounts payable
Other
Current liabilities
$ 1,588
1,545
$10,262
$ 3,395
Long-term debt
Other
Minority interest
Long-term liabilities
1,054
206
1,356
$10,223
$ 2,639
Stockholders equity
Total liabilities and equity
$14,275
$10,309
General Information
The Caltex Group of Companies (Group) is jointly owned 50% each by Chevron Corporation and Texaco Inc. (collectively, the Stockholders) and was created in 1936 by its two owners to produce, transport, refine, and market crude oil and petroleum products.
Note 4Equity in Affiliates
Investments in affiliates at equity include the following:
Caltex Australia Limited

Koa Oil Company, Limited (sold August, 1999)
LG-Caltex Oil Corporation
Star Petroleum Refining
All other
Equity %
1999
1998
50%
50%
50%
64%
Various
$ 260
1,441
269
$2,157
$2,127
$ 324
298
1,170
304
$2,158
$2,254
W85
OFF-BALANCE-SHEET FINANCING TECHNIQUES FOR TEXACO AND CALTEX

Shown below is summarized combined financial information for equity affiliates:
100%
Current assets
Other assets
Current liabilities
Other liabilities
Net worth
Equity Share
1999
1998
1999
1998
$3,005
6,333
(3,351)
.(1,883)
$4,104
$3,689
7,689
(3,547)
.(3,505)
$4,326
$1,535
3,287
(1,816)
..$(937)
$2,069
$1,855
4,004
(1,795)
.(1,866)
$2,198
100%
Operating revenues
Operating income
Net income
Equity Share
1999
1998
1997
1999
1998
1997
$12,796
726
539
$11,811
1,101
193
$14,669
1,078
853
$6,511
358
252
$5,968
539
58
$7,452
532
390
Cash dividends received from these affiliates were $71 million, $50 million, and $43 million in 1999,
1998, and 1997, respectively.
Retained earnings as of December 31, 1999 and 1998 includes $1.4 billion which represents the
Groups share of undistributed earnings of affiliates at equity.
Note 7Operating Leases
The Group has operating leases involving various marketing assets for which net rental expense was
$112 million, $103 million, and $105 million in 1999, 1998, and 1997, respectively.
Future net minimum rental commitments under operating leases having non-cancelable terms in
excess of one year are as follows (in Millions of U.S. Dollars): 2000$66; 2001$42; 2002$30;
2003$13; 2004$10; and 2005 and thereafter$37.
Note 9Commitments and Contingencies
. . . .A Caltex subsidiary has a contractual commitment until 2007 to purchase petroleum products in
conjunction with the financing of a refinery owned by an affiliate. Total future estimated commitments
under this contract, based on current pricing and projected growth rates, are approximately $700 million per year. Purchases (in billions of U.S. dollars) under this and other similar contracts were $0.7,
$0.8, and $1.0 in 1999, 1998, and 1997, respectively.
. . .Caltex is contingently liable for sponsor support funding for a maximum of $278 million in connection with an affiliates project finance obligations. The project has been operational since 1996 and has
successfully completed all mechanical, technical, and reliability tests associated with the plant physical
completion covenant. However, the affiliate has been unable to satisfy a covenant relating to a working
capital requirement. As a result, a technical event of default exists which has not been waived by the
lenders. The lenders have not enforced their rights and remedies under the finance agreements and they
have not indicated an intention to do so. The affiliate is current on these financial obligations and anticipates resolving the issue with its secured creditors during further restructuring discussions. During
1999, Caltex and the other sponsor provided temporary short-term extended trade credit related to
crude oil supply with an outstanding balance owing to Caltex at December 31, 1999 of $149 million.
Environmental Matters
The Groups environmental policies encompass the existing laws in each country in which the Group
operates, and the Groups own internal standards. Expenditures that create future benefits or contribute
to future revenue generation are capitalized. Future remediation costs are accrued based on estimates of
known environmental exposure even if uncertainties exist about the ultimate cost of the remediation.
Such accruals are based on the best available undiscounted estimates using data primarily developed by
third party experts. Costs of environmental compliance for past and ongoing operations, including
maintenance and monitoring, are expensed as incurred. Recoveries from third parties are recorded as
assets when realizable.
EXHIBIT 11C-2. TEXACO AFFILIATES: EQUILON AND MOTIVA

Excerpts from 1999 Financial Statements ($millions)
Condensed Consolidated Income Statement
Equilon
Motiva
Sales and other operating revenue
$29,174
$12,196
Cost of sales
Selling, general, and administrative
Depreciation, depletion, and amortization
Total expenses
26,747
1,308
$28,878
$28,933
10,917
876
$12,378
$12,171
Operating income
Equity in income of affiliates
Dividends, interest and other income
Interest expense
Minority interest
Total other income (deductions)
241
154
70
(115)
$2891(3)
$ 106
25
,
,
(94)
$12 ,
$ (94)
Net income
347
(69)
Condensed Consolidated Balance Sheet

December 31, 1999
Equilon
Motiva
$ 4,209
529
6,312
1 1,367
$11,417
$1,271
180
4,974
6 ,153
$6,578
Short-term debt
Accounts payable
Other
Current liabilities
2,157
2,481
1 1,998
$ 5,636
363
377
1 ,538
$1,278
Long-term debt
Other liabilities
Long-term liabilities
Stockholders equity
5
11 ,730
$ ,735
2 5,046
$11,417
1,451
2 ,644
$2,095
$3,205
$6,578
Assets
Current assets
Investments & advances
Net property
Other assets
Total assets
Equity in Affiliates
Equilon: Summarized financial information for Equilons affiliate investments and Equilons equity
share thereof for the year ended December 31, 1999 is as follows:
Equity Companies at 100% and at Equilons Percentage Ownership ($ millions)
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities and deferred credits
Net assets
Revenues
Income before income taxes
Net income
Dividends received
W86
100%
Equilons Share
$1,684
3,601
(1,585)
(2,543)
$1,157
$ 750
1,097
(629)
$1(692)
$ 526
2,002
664
494
615
176
154
144
W87
OFF-BALANCE-SHEET FINANCING TECHNIQUES FOR TEXACO AND CALTEX

Operating Leases and Throughput Agreements
As of December 31, 1999 Equilon and Motiva had estimated minimum commitments for payment of
rentals under leases that, at inception, had a non-cancelable term of more than one year, as follows:
($ millions)
Equilon
2000
2001
2002
2003
2004
After 2004
Total
Less sublease rental income
Total lease commitments
76
63
62
61
59
$1,775
$1,096
$1,075
$1,021
Motiva
$ 51
49
47
39
38
$410
$634
$1
$634
Equilon has assumed crude and refined product throughput commitments previously made by Shell and
Texaco to ship through affiliated pipeline companies and an offshore oil port, some of which relate to
financing arrangements. As of December 31, 1999 and 1998, the maximum exposure was estimated to
be $297 million and $333 million, respectively. No advances have resulted from these obligations.
Motiva was formed and began operations in July 1998 as a joint venture among Shell,
Texaco, and Saudi Refining, Inc., a corporate affiliate of Saudi Aramco. Motiva combines Texacos and Saudi Aramcos interests and major elements of Shells eastern and
Gulf Coast U.S. refining and marketing businesses. Texaco and Saudi Refining, Inc.,
each owns 32.5% and Shell owns 35% of Motiva. Motiva refines and markets gasoline
and other petroleum products under the Shell and Texaco brand names in all or part of
26 states and the District of Columbia, providing product to almost 14,000 Shell- and
Texaco-branded retail outlets.
Exhibit 11C-2 contains the condensed balance sheet, income statement, and selected footnotes
of Equilon and Motiva, all extracted from Texacos 1999 10-K report.
6. Using the data from Exhibit 11C-2, compute the appropriate adjustments to Texacos financial statements and recompute the ratios calculated in Question 1.
CASE 13-1
Coca-Cola: Consolidation Versus Equity Method
Coca-Cola (Coke) [KO] is the largest soft drink firm in the world. However, Coke does not bottle
and distribute its beverages; that activity is carried out by affiliates in which Coke has a large equity interest.
Coca-Cola Enterprises (Enterprises) [CCE] is the worlds largest marketer and distributor of
Coke products. The relationship between the two firms is complex:
1. Enterprises produces virtually all its products under license from Coke and buys soft
drink syrup, concentrates, and sweeteners directly from or through Coke.
2. Coke provides national advertising as well as local marketing support for Enterprises
products.
3. Through programs such as Jumpstart that are designed to accelerate the placement of
cold drink equipment, Coke provides funding to Enterprises to help set up the infrastructure required to distribute its products.
4. Approximately 90% of Enterprises sales volume is generated through the sale of products of The Coca-Cola Company; raw materials purchased from Coke account for over
50% of Enterprises cost of goods sold. To a great extent, Coke controls Enterprises
products and input costs.
5. Three members of Enterprises board of directors are current officers of Coke.
It would not be an understatement to suggest that Enterprises (and Cokes other affiliated bottling
companies) are an integral part of Cokes success, providing an outlet for its products. However,
by keeping its ownership below 50%, Coke has been able to use the equity method to report its
interest in Enterprises and the other bottlers.
Exhibit 13C1-1 contains condensed 2001 financial statements of Coke and Coca-Cola Enterprises. The following information with respect to its ownership interest in its bottlers is excerpted from Cokes financial statements:
Coca-Cola Enterprises is the largest soft drink bottler in the world. Coke owns approximately 38 percent of the outstanding common stock of Coca-Cola Enterprises and, accordingly, accounts for its investment by the equity method of accounting.
At December 31, 2001, the Company owned approximately 35 percent of Coca-Cola
Amatil, an Australia-based bottler of Company products that operates in 12 countries.
As a result of a merger in 2000 between Coca-Cola Beverages and Hellenic Bottling
Company S.A. to form the combined entity Coca-Cola HBC S.A., Cokes previous 50.5%
ownership in Coca-Cola Beverages was reduced to a 24% share of the combined entity
Coca-Cola HBC S.A.
Coke states in its MD&A that
In line with our long-term bottling strategy, we consider alternatives for reducing our ownership interest in a bottler. One alternative is to combine our bottling interests with the bottling interests of
others to form strategic business alliances. Another alternative is to sell our interest in a bottling operation to one of our equity investee bottlers. In both of these situations, we continue to participate
in the bottlers results of operations through our share of the equity investees earnings or losses.
Additional information that is also relevant to analysis of the bottling affiliates is presented below:
2001 Financial Information ($ in millions)
Intercompany sales
Net marketing payments
From Coke to Enterprises

From Enterprises to Coke
From Coke to Enterprises
$3,900
395
606
(Continued on page W90.)
W88
W89
COCA-COLA: CONSOLIDATION VERSUS EQUITY METHOD
EXHIBIT 13C1-1. THE COCA-COLA COMPANY AND COCA-COLA ENTERPRISES

Condensed 2001 Financial Statements (in millions)
Balance Sheets at December 31, 2001
Coke
Enterprises
Current Assets
Cash and marketable securities
Trade accounts receivable
Inventories
Prepaid expenses and other assets
Investments
Equity method investments
Coca-Cola Enterprises
Coca-Cola Amatil Limited
Coca-Cola HBC S.A
Other, principally bottling companies
Cost method investments, principally bottling companies
Other assets
Property, Plant, and Equipment (Net)

Intangible assets*
Total assets
$ 1,934
1,882
1,055
$12,300
$ 7,171
284
1,540
690
$23,362
$ 2,876
788
432
791
3,117
294
$22,792
$ 8,214
$23,1
4,453
$12,579
$22,417
6,206
$14,637
$23,719
$ 4,530
$ 2,610
38
Current Liabilities
Accounts payable and accrued liabilities
Accounts payable to The Coca-Cola Company
Deferred cash payments from The Coca-Cola
Company
Notes payable and current debt
$23,899
$ 8,429
70
$11,804
$ 4,522
1,219
961
442
10,365
1,166
4,336
$23,1
$ 2,622
$16,510
$16,377
873
3,520
23,443
(2,788)
(13,682)
$11,366
$22,417
37
453
2,527
220
(292)
$12(125)
$ 2,820
$23,719
Noncurrent Liabilities
Long-term debt
Deferred taxes
Deferred cash payments from The Coca-Cola
Company
Shareholders Equity
Preferred stock
Common stock
Capital surplus
Retained earnings
Other comprehensive income
Treasury stock
*Intangible assets of Coke consist primarily of goodwill and trademarks. Intangible assets for Enterprises consist
primarily of franchise rights to bottle Coca-Cola products.
W90
CASE 13-1
EXHIBIT 13C1-1 (continued)

Income Statement, Year Ended December 31, 2001
Net operating revenues
Cost of goods sold
Gross profit
Selling, administrative, and general expenses
Operating income
Interest income
Interest expense
Equity income
Other income
Income before taxes
Income taxes
Income before cumulative effect of accounting change
Cumulative effect of accounting change
Net income
Preferred dividends
Net income (loss) applicable to common shareholders
Cash Flow Statements,
Coke
Enterprises
$20,092
$,(6,044)
$14,048
$,(8,696)
$ 5,352
325
(289)
152
$11,130
$ 5,670
$,(1,691)
$ 3,979
$111(10)
$ 3,969
$11,3
$ 3,969
$15,700
$,(9,740)
$ 5,960
$,(5,359)
$ 601
(753)
$11,512
$ (150)
$11,131
$
(19)
$11(302)
$ (321)
$1111(3)
$ (324)
Coke
Enterprises
Cash Flow from Operations

Net income
Equity income, net of dividends
Other adjustments
Cash Flows from Investing Activities
$ 3,969
(54)
$11,195
$ 4,110
(1,188)
(324)
(926)
(113)
$ (1,791)
$ (2,830)
$212(45)
$
47
946
12
$111(72)
$ 886
$11,3
$ (10)
$11,438
$ 1,114
(2,010)
Cash Flows from Financing Activities

Debt financing
Issue and repurchase of stock
Dividends
Effect of exchange rate changes
Change in cash
Source: Adapted from 2001 annual reports of The Coca-Cola Company and Coca-Cola Enterprises.
Prior to 2001, Enterprises had recorded payments received from Coke for programs such
as Jumpstart as offsets to expenses incurred in constructing the infrastructure. Starting in
2001, Enterprises changed its accounting and recorded the money received as obligations to Coke to be amortized over the life of the programs. Coke, itself, records these expenditures as part of Other Assets and amortizes them over time.
Required:
1. Given the relationship between Coke and Enterprises, discuss the appropriateness of
Cokes use of the equity method to account for its investment in Enterprises.
2. Prepare a 2001 balance sheet, income statement, and cash flow statement for Coke,
with Enterprises fully consolidated.
3. Compute the following ratios for Coke (as reported), Enterprises, and Coke after full consolidation of Enterprises:
(a) Current ratio
(h) Return on assets
(b) Debt-to-equity
(i) Return on tangible assets
(c) Debt-to-tangible equity
(j) Return on equity
(d) Debt-to-assets
(k) Return on tangible equity
(e) Current ratio
(l) Times interest earned
(f) Debt-to-equity
(m) Inventory turnover
(g) Debt-to-tangible equity
(n) Receivable turnover
W91
EXHIBIT 13C1-2. THE COCA-COLA COMPANY AND SUBSIDIARIES

Supplementary Data
Notes to Consolidated Financial Statements
Other Equity Investments
Operating results include our proportionate share of income (loss) from our equity investments. A summary of financial information for our equity investments in the aggregate, other than Coca-Cola Enterprises, is as follows
(in millions):
December 31,
2001
2000
$ 6,013
$17,879
$23,892
$ 5,085
$ 7,806
$12,891
$11,001
$ 4,340
$ 5,985
$19,030
$25,015
$ 5,419
$ 8,357
$13,776
$11,239
$ 4,539
Year Ended December 31,
2001
2000
1999
Net operating revenues (1)

Cost of goods sold
Gross profit (1)
Operating income (loss)
Cash operating profit (2)
Net income (loss)
$19,955
$11,413
$ 8,542
$ 1,770
$ 3,171
$ 735
$21,423
$13,014
$ 8,409
$ (24)
$ 2,796
$ (894)
$19,605
$12,085
$ 7,520
$ 809
$ 2,474
$ (134)
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Shareowners equity
Company equity investment
Notes: Equity investments include non-bottling investees.

(1) 2000 and 1999 Net operating revenues and Gross profit have been reclassified for EITF Issue No. 00-14
and EITF Issue No. 00-22.
(2) Cash operating profit is defined as operating income plus depreciation expense, amortization expense
and other non-cash operating expenses.
Net sales to equity investees other than Coca-Cola Enterprises were $3.7 billion in 2001, $3.5 billion in
2000, and $3.2 billion in 1999. Total support payments, primarily marketing, made to equity investees
other than Coca-Cola Enterprises, the majority of which are located outside the United States, were approximately $636 million, $663 million, and $685 million for 2001, 2000, and 1999, respectively.
In February 2001, the Company reached an agreement with Carlsberg A/S (Carlsberg) for the dissolution of Coca-Cola Nordic Beverages (CCNB), a joint venture bottler in which our Company had a
49 percent ownership. In July 2001, our Company and San Miguel Corporation (San Miguel) acquired
Coca-Cola Bottlers Philippines (CCBPI) from Coca-Cola Amatil Limited (Coca-Cola Amatil).
In November 2001, our Company sold nearly all of its ownership interests in various Russian bottling operations to Coca-Cola HBC S.A. (CCHBC) for approximately $170 million in cash and notes receivable, of which $146 million in notes receivable remained outstanding as of December 31, 2001.
These interests consisted of the Companys 40 percent ownership interest in a joint venture with CCHBC
that operates bottling territories in Siberia and parts of Western Russia, together with our Companys
nearly 100 percent interests in bottling operations with territories covering the remainder of Russia.
In July 2000, a merger of Coca-Cola Beverages plc (Coca-Cola Beverages) and Hellenic Bottling
Company S.A. was completed to create CCHBC. This merger resulted in a decrease in our Companys
equity ownership interest from approximately 50.5 percent of Coca-Cola Beverages to approximately
24 percent of the combined entity, CCHBC.
In July 1999, we acquired from Fraser and Neave Limited its ownership interest in F&N CocaCola Pte Limited.
If valued at the December 31, 2001, quoted closing prices of shares actively traded on stock markets, the value of our equity investments in publicly traded bottlers other than Coca-Cola Enterprises
exceeded our carrying value by approximately $800 million.
Source: Coca-Cola 2001 Annual Report
W92
CASE 13-1
4. Discuss the differences in the ratios in part 3 between Coke as reported and after the
consolidation of Enterprises.
5. Repeat parts 2 through 4, but using proportionate consolidation for Enterprises.
6. Exhibit 13C1-2 contains summarized data regarding Cokes other bottling affiliates (excluding Enterprises) accounted for using the equity method. Discuss the expected effect
of:
(i) Full consolidation on Cokes financial statements.
(ii) Proportionate consolidation
7. Discuss the expected effect of the FASB exposure draft on consolidation (Box 13-3) on
Cokes accounting treatment of its bottling affiliates.
8. Coke states In line with our long-term bottling strategy, we consider alternatives for reducing our ownership interest in a bottler. Discuss Cokes motivation to reduce such
ownership interests.
9. As a financial analyst, discuss the advantages and disadvantages of viewing Coke, with
its bottling affiliates:
(i) On the equity method
(ii) Proportionately consolidated
(iii) Fully consolidated
CASE 14-1
Conversion of Pooling to Purchase Method
Pfizer Acquisition of Warner-Lambert
INTRODUCTION
On June 19, 2000 Pfizer [PFE] merged with Warner-Lambert [WLA], issuing approximately
2,440 million PFE shares in exchange for all of the equity of WLA. The merger was accounted
for as a pooling of interests as permitted by U.S. GAAP at that time.
CASE OBJECTIVES
1. Determine the effect of the acquisition of Warner-Lambert on Pfizers financial statements.
2. Compare the financial statement effects of the merger with the effects if Pfizer had accounted for the acquisition as a purchase under
(i) U.S. GAAP (SFAS 141 and SFAS 142)
(ii) IAS GAAP
Exhibit 14C1-1 shows the condensed balance sheet of Warner-Lambert on December 31, 1999.
Exhibit 14C1-2 contains extracts from WLAs financial statement footnotes on the same date. Exhibit 14C1-3 shows the condensed income and cash flow statements for Warner-Lambert for the
year ended December 31, 1999. Use these exhibits and the Pfizer 1999 financial statements on
the CD/website to answer the following questions.
1. Describe the effects of the merger with Warner-Lambert on Pfizers 1999
(i) Balance sheet
(ii) Income statement
(iii) Cash flow statement
(iv) Financial statement footnotes
as reported in Pfizers 2000 Annual Report
2. Compute the effect of the merger with Warner-Lambert on each of the following Pfizer
ratios for 1999:
(i) Current ratio
(ii) Total debt to equity
(iii) Book value per share
(iv) Gross profit margin
(v) Operating profit margin
(vi) Return on equity
(vii) Cash from operations (CFO) to debt
EXHIBIT 14C1-1. WARNER-LAMBERT

Condensed Balance Sheet at December 31, 1999
Amounts in $ millions
Inventories
Property (net)
Investments and other assets
Intangible assets
Totals
$ 1,943
979
2,768
3,342
793
$11,616
$11,441
Short-term debt
Long-term debt
Deferred income tax
Stockholders equity
297
3,391
1,250
463
942
$15,098
$11,441
Source: Warner-Lambert 1999 10-K
W93
W94
CASE 14-1
CONVERSION OF POOLING TO PURCHASE METHOD
PFIZER ACQUISITION OF WARNER-LAMBERT

Extracts from Footnotes at December 31, 1999
Amounts in $ Millions
Fair Values of Financial Instruments
Carrying Amount
Investment securities
Long-term debt
Foreign exchange contracts
Pensions and Other Postretirement Benefits
Pensions
Benefit obligation at year-end

Plan assets at year-end
Amounts recognized on balance sheet:
Prepaid benefit cost
Accrued benefit liability
Intangible asset
Comprehensive income
149
(1,249)
$2,634
2,644
219
(161)
4
14
Assets
Deferred Income Taxes
Fair Value
$
149
(1,222)
(16)
OPEB
$
277
(169)
Liabilities
1,020
463
3. Assume that Pfizer had been required to account for the acquisition of Warner-Lambert
under SFAS 141 and SFAS 142. Prepare a pro forma balance sheet for December 31,
1999 using the Pfizer balance sheet on the CD/website, the data in Exhibits 14C1-1
and 14C1-2, and the following assumptions:
(i) The price of PFE shares on that date was $32.44
(ii) The following fair values of WLA assets ($millions):
Inventories
$1,250
Fixed assets
4,000
In process research and development
1,000
4. Prepare a pro forma 1999 income statement for Pfizer as if the merger had occurred
January 1, 1999, using the data and assumptions from Question 3. State any additional
assumptions required to prepare the income statement.
5. Redo Question 2 using the data and assumptions from Questions 3 and 4.
6. Describe the effect of the acquisition of Warner-Lambert, using the assumptions from
Question 3, on Pfizers
(i) Income statement for 2000
(ii) Income statement for following years
Condensed Income and Cash Flow Statements, Year Ended December 31, 1999
Condensed Income Statement
Sales
Cost of goods sold
Selling, general, administrative
Research and development
Other expense, net
Pretax income
Income tax expense
Net income
Condensed Cash Flow Statement

$12,929
(3,042)
(5,959)
(1,259)
$1, (228)
$ 2,441
$1, (798)
$ 1,643
Operating activities
Investing activities
Financing activities
Exchange rate effects
Increase in cash
$2,437
(1,234)
(500)
$1, (15)
$ 688
CONVERSION OF POOLING TO PURCHASE METHOD
7.
8.
9.
10.
11.
W95
PFIZER ACQUISITION OF WARNER-LAMBERT
(iii) Cash flow statement for 2000

(iv) Cash flow statement for following years
Using your answers to the prior questions, explain why PFE preferred using the pooling
of interest method to account for the acquisition.
From the perspective of a financial analyst, state two advantages of each accounting
method (pooling and purchase).
Now assume that Pfizer accounted for the acquisition of Warner-Lambert using IAS
GAAP. Redo Questions 3 through 6, in each case showing how the effect of IAS GAAP
differs from SFAS 141 and 142.
State and justify whether Pfizer, given a choice, is likely to prefer using IAS standards to
account for the acquisition of WLA, rather than SFAS 141 and 142.
In 2000 Pfizer recorded an income statement charge for merger-related costs, broken
down as follows (in $millions):
Payment to American Home Products*
Transaction costs
Restructuring charges
Integration costs
Total
$1,838
226
947
$3,246
$3,257
Discuss which (if any) of these components should be included in Pfizers net income for valuation purposes.
*For termination of merger agreement with Warner-Lambert0
CASE 14-2
Conversion of Purchase to Pooling Method
Westvaco Acquisition of Mead
INTRODUCTION
On January 29, 2002 Westvaco [W] merged with Mead [MEA], issuing approximately 99.2 million
shares and $119 million cash in exchange for all of the equity of MEA. The merger was accounted
for as a purchase as required by SFAS 141. While the companies were quite similar in size, and
the merger was presented as a merger of equals, Westvaco was deemed to be the acquirer. The
new (combined) company is called MeadWestvaco [MWV]. The purchase price was estimated as:
Value of MWV shares issued (at $30.06 per share)
Cash paid to MEA shareholders
Value of MEA stock options
Transaction costs
Total
which was allocated as follows:
Mead net assets at historical cost
Fair value adjustments
Elimination of MEA goodwill
Acquisition goodwill recognized
Total
$2,981 million
119
85
$3,235
$3,220
2,317
846
(257)
$3,314
$3,220
CASE OBJECTIVES
1. Determine the effect of the acquisition of Mead on Westvacos financial statements.
2. Compare the financial statement effects of the merger with the effects if Westvaco had
accounted for the acquisition as a purchase under IAS GAAP:
(i) Using the purchase method
(ii) Using the pooling of interests method
3. Compare the financial statement effects of the merger with the effects if it had been accounted for as a purchase under US GAAP but with Mead as the acquirer.
Exhibit 14C2-1 shows the pro forma condensed balance sheet of the combined company
(MWV) as of October 31, 2001. Exhibit 14C2-2 shows the pro forma condensed income statement of MWV for the year ended October 31, 2001. Use these exhibits and the additional information provided to answer the following questions.
1. Describe the effects of the merger with Mead on Westvacos 2001 and 2002
(i) Balance sheet
(ii) Income statement
(iii) Cash flow statement
(iv) Financial statement footnotes
2. Compute the effect of the merger with Mead on each of the following Westvaco ratios
for 2001:
(i) Current ratio
(ii) Total debt to equity
(iii) Book value per share
(iv) Gross profit margin
(v) Operating profit margin
(vi) Interest coverage ratio
(vii) Return on ending equity
W96
W97
CASE OBJECTIVES
EXHIBIT 14C2-1. MEADWESTVACO

Pro Forma Condensed Balance Sheet
Amounts in $ millions
October 31, 2001
Adjustments
Assets
Accounts receivable
Inventories
Total current assets
Property (net)
Prepaid pension asset
Goodwill
Other assets
Total assets
Westvaco
$
Mead
81
415
426
$1,094
$1,016
4,227
780
565
$6,199
$6,787
173
$6,528
$ 701
2,660
1,008
$4.477
$4,446
$2,341
$6,787
102.4
227
$6,698
$ 925
1,315
591
$3,311
$3,142
$2,317
$5,459
99.1
Amount
51
471
540
$1,107
$1,169
3,129
317
257
$6,587
$5,459
Combined
$
$ 209
$11(65)
$ 144
1,248
(229)
57
$6,193
$1,313
1
2
3
4
5
6
132
886
1,175
$13,136
$ 2,329
8,604
868
879
$13,879
$13,559

Current debt
Total current liabilities
Long-term debt
Deferred income tax
Other liabilities
Total liabilities
Stockholders equity
Liabilities and equity
Millions of shares outstanding
148
$6,110
$ 258
(7)
297
$1,310
$ 558
$1,755
$1,313
7
8
9
10
11
12
548
$11,336
$ 1,884
3,968
1,896
$13,398
$ 8,146
$15,413
$13,559
198.5
Adjustment #
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Fair value adjustment

Deferred income tax
Pension plan adjustment to plan status
Acquisition goodwill less elimination of Mead goodwill
Debt incurred for payments to Mead shareholders and other costs
Transaction and restructuring costs and fair value adjustments
Deferred income tax
Pension and OPEB adjustments to plan status
Replace Mead equity with value of MWV shares issued
Source: Adapted from March 8, 2002 corporate release
3. Discuss the effect of use of the purchase method on MWVs

(i) Trend of reported revenue for fiscal years 20012003
(ii) Trend of reported income for fiscal years 20012003
(iii) Trend of reported CFO for fiscal years 20012003
(iv) Trend of balance sheet ratios for fiscal years 20012003
4. From the perspective of a financial analyst, explain the usefulness of the pro forma financial statements.
5. Discuss whether the restructuring charges should be included in pro forma net income
for analysis purposes.
W98
CASE 14-2
CONVERSION OF PURCHASE TO POOLING METHOD
WESTVACO ACQUISITION OF MEAD
EXHIBIT 14C2-2. MEADWESTVACO

Pro Forma Condensed Income Statement
Year Ended October 31, 2001
Adjustments
Sales
Cost of goods sold
Gross margin
Selling and administrative
Restructuring charges
Other revenues
EBIT
Interest expense
Pretax income
Income tax expense
Net income
Earnings per share
Average shares (millions)
Westvaco
Mead
$ 3,935
$ (3,241)
$ 694
(364)
(52)
$3,2 (48
$ 326
$12(208)
$ 118
$3,2 (30)
$
88
$ 4,176
$ (3,597)
$ 579
(494)
(45)
$13,119
$
59
$41(110)
$ (51)
$13,134
$ (17)
0.87
101.5
Amount
$(43)
$(43)
(5)
$1(1)
$(49)
$1(4)
$(53)
$(20
$(33)
Combined
4
5
0.18
99.1
$ 8,111
$(6,881)
$ 1,230
(863)
(97)
$(6,166
$ 336
$1,(322)
$
14
$81124
$
38
0.19
197.6
Adjustment #
1. Additional depreciation resulting from fair value adjustment less Mead goodwill amortization and
effect of pension plan adjustments
2. Amortization of higher fair value of Mead intangible assets
3. Same as #2
4. Interest on new debt and amortization of fair value debt adjustment
5. Income tax effects of other adjustments
Source: Adapted from March 8, 2002 corporate release
6. Assume that Westvaco had been required to account for the acquisition of Mead using
the purchase method under IAS GAAP. Discuss any differences in the effect of the
merger on the combined companys
(i) Pro forma balance sheet at October 31, 2001
(ii) Pro forma income statement for the year ended October 31, 2001
7. Assume that the merger had been accounted for as the acquisition of Westvaco by
Mead using the purchase method under US GAAP. Using the following fair value adjustment information for Westvaco, prepare a pro forma balance sheet for the combined company at October 31, 2001:
Assets
Inventories
Capitalized operating leases
Timberland
Liabilities
135
145
461
Long-term debt
Capitalized leases
Deferred income tax
100
145
(1,007)
Note: information from Exhibit 14C2-1 and the introduction is also required to answer this question.
8. Discuss any differences (from the actual method used) in the effect of the merger on the
combined companys
(i) Trend of reported revenue for fiscal years 20012003
(ii) Trend of reported income for fiscal years 20012003
(iii) Trend of reported CFO for fiscal years 20012003
(iv) Trend of balance sheet ratios for fiscal years 20012003
CASE OBJECTIVES
W99
9. Now assume that Westvaco accounted for the acquisition of Mead using the pooling
method under IAS GAAP. Prepare a pro forma condensed:
(i) balance sheet for the combined company as of October 31, 2001, using the format
of Exhibit 14C2-1.
(ii) income statement for the combined company for the year ended October 31,
2001, using the format of Exhibit 14C2-2.
10. Redo Questions 1 through 3, in each case showing how the effect of IAS GAAP differs
from US GAAP.
11. State and justify which method, given a choice, the companies would have preferred to
use to account for the merger.
CASE 15-1 AFLAC

Analysis of Exchange Rate Effects: Single Currency
INTRODUCTION
AFLAC (American Family Life) is a major specialty insurance company. Although the company
is American, its Japanese subsidiary, AFLAC Japan, accounted for 85% of 1995 revenues and
90% of assets. Because AFLAC presents its financial statements in U.S. dollars, changes in the
yen-dollar exchange rate have important effects on reported income, net worth, cash flow, and
financial ratios.
With only a single foreign currency, the complexity that often characterizes the analysis of
exchange effects is eliminated. The yen is one of the worlds major currencies, and exchange
rate data are widely available. As a result, the impact of exchange rate changes is easier to calculate and understand.
CASE OBJECTIVES
The objectives of this case are to use AFLAC to:
1. Show the effects of exchange rate changes on levels and trends of revenue, income, cash
flow, and financial position.
2. Calculate translation gains and losses.
3. Show how currency exposure can be managed.
EXCHANGE RATE EFFECTS ON INCOME STATEMENT

As AFLAC Japan dominates corporate results, we start with an examination of that subsidiary.
Exhibit 15C1-1 shows the revenues and pretax income of AFLAC Japan over the 1986 to 1995
period, in both Japanese yen and U.S. dollars. The average annual yen-dollar exchange rates are
also provided. The Japanese yen rose from 168 to the dollar (1986 average) to 94 to the dollar
(1995 average) over this time span, rising in seven of the nine years. The strengthening yen magnified the growth rate of AFLAC Japan, as yen results were translated into U.S. dollars at ever
higher rates. Revenues rose from 154 billion yen (1986) to 575 billion yen in 1995, an increase
of 274%; the nine-year increase in U.S. dollars was 570%. Due to an average 6% increase in
the value of the yen, average revenue growth of less than 16% (in yen) was reported as more
than 24% in dollars.
The effect of the yens rise on reported pretax earnings was equally dramatic. Over the
1986 to 1995 period, AFLAC Japans pretax earnings increased 175% in yen but 392% after
translation to U.S. dollars. It should be noted that the effect of the exchange rate on revenue and
pretax income is not affected by the choice of functional currency in this case; all the subsidiaries revenues and expenses are monetary.1
However, the exchange rate effect was not beneficial every year. As shown in Exhibit
15C1-1, the U.S. dollar revenue growth rate was only 2.8% in 1989, as 10.7% revenue
growth (in yen) was mostly offset by a 7.7% decline in the yen relative to the dollar. A further
yen decline in 1990 again resulted in a lower growth rate in dollars than in yen. Pretax income gains in 1989 to 1990 were also depressed (when reported in dollars) by the falling
yen.
AFLAC Japans growth rate has declined (in yen) in recent years. Strong gains by the yen,
however, made the revenue growth rate accelerate (in dollars) in the 1990s.
As an insurance company, AFLAC has immaterial depreciation and no cost of goods sold.
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EXCHANGE RATE EFFECTS ON BALANCE SHEET
EXHIBIT 15C1-1. AFLAC JAPAN

Exchange Rate Effects on Revenues and Pretax Operating Income
(Japanese Yen and U.S. $ in Billions)
Revenues
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
Pretax Operating Income
Yen
Rate
Dollars
Yen
Rate
Dollars
153.9
194.1
218.7
242.1
286.7
339.8
399.6
456.3
524.3
575.5
168.56
144.67
128.19
138.00
144.83
134.52
126.67
111.21
102.26
94.10
0.913
1.342
1.706
1.754
1.980
2.526
3.155
4.103
5.127
6.116
19.2
21.0
23.5
27.8
31.8
35.6
40.3
44.4
48.2
52.8
168.56
144.67
128.19
138.00
144.83
134.52
126.67
111.21
102.26
94.10
0.114
0.145
0.183
0.201
0.220
0.265
0.318
0.399
0.471
0.561
Percent Change (%)
Percent Change (%)
Yen
Rate
Dollars
Yen
Rate
Dollars
1987
1988
1989
1990
1991
1992
1993
1994
1995
26.1
12.7
10.7
18.4
18.5
17.6
14.2
14.9
9.8
14.2
11.4
7.7
4.9
7.1
5.8
12.2
8.0
8.0
46.9
27.2
2.8
12.8
27.6
24.9
30.1
25.0
19.3
9.4
11.9
18.3
14.4
11.9
13.2
10.2
8.6
9.5
14.2
11.4
7.7
4.9
7.1
5.8
12.2
8.0
8.0
27.4
26.3
9.9
9.0
20.5
20.2
25.5
18.1
19.0
Average
15.9
6.0
24.1
11.9
6.0
19.5
Source: AFLAC, 1995 Annual Report.
EXCHANGE RATE EFFECTS ON CASH FLOW

As AFLAC Japans cash flows are translated into dollars at the average exchange rate, the
strengthening yen also increased reported cash flow, as can be seen from the following data:
Cash Flow from Operations ($ in billions)
Consolidated
AFLAC Japan
% Increase
Exchange rate effect
1993
1994
1995
$1.8
1.7
N/A
N/A
$2.4
2.1
24%
9%
$2.9
2.7
28%
9%
Exchange rates accounted for approximately one-third of the increase in AFLAC Japans cash
from operations over the 1993 to 1995 period; AFLAC Japan accounted for more than 90% of
consolidated cash from operations.
EXCHANGE RATE EFFECTS ON BALANCE SHEET

Because AFLAC Japan has no inventories and almost no fixed assets, its assets and liabilities are
virtually all translated at current exchange rates.2 Thus, changes in the yen-dollar exchange rate directly affect the consolidated balance sheet as AFLAC Japan accounts for 90% of corporate assets.
2
This is true regardless of whether the functional currency is the yen or dollar.
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CASE 15-1 AFLAC
ANALYSIS OF EXCHANGE RATE EFFECTS: SINGLE CURRENCY
The effect on total assets can be seen in Exhibit 15C1-2. Appreciation of the yen against the
dollar increased the growth rate of total assets. Although assets grew 476% in yen over the 1986
to 1995 period, the growth rate in dollars was 799%. The yen appreciated in six of the nine
years. Note that the exchange rate effects each year differ from the income statement effects
shown in Exhibit 15C1-1. The reason is that balance sheet accounts are translated at the closing
rate for the year, whereas income statement (and cash flow) accounts are translated at the average rate. For example, although the yens average rate appreciated 8% during 1995, its closing
rate at December 31, 1995 declined 3.1% from the rate one year earlier.
Although liabilities also increased as the yen rose, significant net assets in yen had a positive effect on stockholders equity in dollars. As the Japanese yen is the functional currency for
AFLAC Japan, translation gains and losses are accumulated in the cumulative translation adjustment (CTA) mandated by SFAS 52. At December 31, 1995, the CTA was $213 million, or 10%
of AFLAC consolidated equity.
With the yen as the functional currency, the CTA is a function of changes in the yen-dollar
exchange rate and the net assets (in yen) of AFLAC Japan. Given the substantial size (and net
worth) of AFLAC Japan, we would expect the CTA to increase when the yen rises and decline
when it falls. Changes in the CTA over the 1993 to 1995 period were
12/31/93
12/31/94
12/31/95
Opening CTA
Increase during year
$ 68,978
$154,316
$123,294
$150,797
$174,091
$139,228
Closing CTA
$123,294
$174,091
$213,319
Given the depreciation in the yen during 1995, it is surprising that the CTA increased in that
year. That increase can be explained, however, using information provided in AFLACs annual
report and an understanding of how exchange rate changes impact the CTA.
EXHIBIT 15C1-2. AFLAC JAPAN

Exchange Rate Effects on Total Assets (Japanese Yen and U.S. $ in billions)
Total Assets
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
Yen
Rate
Dollars
408.1
511.5
631.0
760.5
909.3
1,093.4
1,285.8
1,523.0
1,822.9
2,351.0
160.60
123.05
126.00
143.55
134.60
125.25
124.70
112.00
99.85
102.95
2.541
4.157
5.008
5.298
6.756
8.730
10.311
13.598
18.256
22.836
Percent Change (%)
1987
1988
1989
1990
1991
1992
1993
1994
1995
Average
Yen
Rate
Dollars
25.3
23.4
20.5
19.6
20.2
17.6
18.4
19.7
29.0
21.5
23.4
2.4
13.9
6.2
6.9
0.4
10.2
10.8
3.1
4.3
63.6
20.5
5.8
27.5
29.2
18.1
31.9
34.3
25.1
28.4
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QUESTIONS FOR FURTHER DISCUSSION
AFLACs yen exposure decreased sharply, from 60 billion yen at December 31, 1994, to 29
billion yen one year later. The reduced exposure resulted from two management decisions:
AFLAC incurred yen debt, designated as a hedge of its investment in AFLAC Japan.
AFLAC Japan increased its U.S. dollar investments by more than $300 million.
But AFLACs yen exposure remained positive, suggesting that the CTA should still have declined
in 1995. The timing of these decisions, however, is crucial to an analysis of their impact.
These transactions apparently took place in the summer of 1995 (the borrowing took place
in August), when the yen rose to approximately 85 per dollar, before declining to the year-end
level of 103 per dollar. The change in CTA during the year, therefore, has two components:
1. An increase due to the yens rise from 100 to 85 (per dollar) from January through August
2. A decline (but with sharply reduced exposure) over the balance of the year
The following calculations approximate the 1995 CTA change:
Dollar exposure at December 31, 1994
Exchange rate
Yen exposure at December 31, 19943
$601.9 million
99.85 yen/dollar
Y 60.1 billion
If we assume the yen borrowing and increase in dollar investments took place August 15, 1995,
at an exchange rate of 85 yen per dollar, the CTA change from January 1 to August 15, 1995
would be
Y 60.1
1
1
$105 million Increase
99.85
85
If the yen exposure was reduced to Y 29 billion on August 15, 1995, the CTA change over the
balance of 1995 (August 15 to December 31) would be
Y 29.3
1
851 102.95
$60 million Decrease
The net increase in the CTA for 1995 would be $105 $60 $45 million. This increase exceeds the actual increase in the CTA during 1995; some of the investment changes were probably made at exchange rates closer to 90 yen per dollar, reducing their positive impact on the
CTA.
Anticipating the reversal of the yen-dollar exchange rate, AFLAC was able to reduce its exposure to the yen sharply and mitigate the effect of the yens decline on the CTA and consolidated stockholders equity. AFLAC describes the critical transactions in its annual reports.
However, the surprising change in the CTA would have alerted a perceptive analyst that a significant alteration in AFLACs yen exposure must have taken place. This is another example of how
financial analysis can focus attention on management actions, even when those actions have
not been reported.
QUESTIONS FOR FURTHER DISCUSSION

1. The yen continued to decline, reaching nearly 110 per dollar by June, 1996. Predict the
effect of this decline on AFLACs:
(a) Revenue growth for the second quarter (ending June 30) of 1996 as compared with
the second quarter of 1995
(b) Growth in pretax income for the second quarter (ending June 30) of 1996 as compared with the second quarter of 1995
(c) CTA change for the six months ended June 30, 1996
(d) Asset growth for the six months ended June 30, 1996
2. AFLAC carries all investments as available-for-sale under SFAS 115 (see Chapter 13).
AFLAC Japans fixed income investments (including those purchased in 1995) are,
$601.9 times 99.85.
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CASE 15-1 AFLAC
ANALYSIS OF EXCHANGE RATE EFFECTS: SINGLE CURRENCY
therefore, reported at their market value in U.S. dollars. The current yield (interest) on
these $U.S. investments is far higher than that on yen investments of comparable
quality.
Discuss the effect of the 1995 shift from yen investments to dollar investments on
1996 growth in investment income (and pretax income) of both:
AFLAC Japan (in yen)
The consolidated enterprise (in U.S. dollars)
3. AFLAC accounts for the U.S. dollar investments of its Japanese subsidiary by reporting
them at market value and ignoring any exchange effects. Yet one might argue that, under
SFAS 52, the U.S. dollar investments of AFLAC Japan should be remeasured into yen, the
functional currency for AFLAC Japan, and then translated into dollars.
Discuss how this accounting approach would alter the reported effects of yen-dollar
changes on reported income.
CASE 15-2
Exchange Rate Effects on Operations and Financial Statements
Aracruz
INTRODUCTION
Aracruz Celulose, S.A. is a leading producer of wood pulp in Brazil. It exports more than 90% of
its production, mainly to the United States and Europe. Its shares are traded in Brazil and on the
New York Stock Exchange [ARA].
Because it is primarily an exporter and international pulp prices are referenced in U.S. dollars, Aracruz finances its operations mainly using $U.S. debt. While almost all operations are located in Brazil, Aracruz prepares financial statements using U.S. GAAP with the U.S. dollar as
the functional currency (see footnote 1(a)).1 The Aracruz 2000 Annual Report (which includes
$U.S. financial statements), is located in the CD and website.
CASE OBJECTIVES
1. Examine the effect of changing exchange rates on the local currency financial statements
of a company that exports most of its output.
2. Forecast future results using alternative exchange rate assumptions.
3. Discuss the expected result of exchange rate changes on a companys common stock
price.
4. Discuss whether the accounting effects of exchange rate changes on foreign operations
are consistent with their economic effects.
The following exchange rates (reai/dollar) should be used for the case:
1998
1999
2000
Average
Year-end
1.16
1.81
1.83
1.21
1.79
1.96
Required:
1. Exhibit 15C2-1 contains the balance sheet for Aracruz at December 31, 1998. Certain
assets and liabilities are subdivided by currency. Using the 2000 financial statements
and footnotes, complete Exhibit 15C2-1 for 1999 and 2000. Note: as currency data is
provided only for total debt, we have aggregated current and non-current debt into a
single amount. Assume that the debt securities are denominated in $U.S., as stated in
footnote 17(a). For simplicity, we have combined all balance sheet amounts denominated in euros with the U.S. dollar amounts.
2. Compute ARAs net debt, segregated between $U.S. and R, at each balance sheet date.
Note: net debt is defined as total debt, less cash and cash equivalents and debt securities available for sale.
3. Using the exchange rates provided in the table above, compute the net debt in reais
(R), segregated between $U.S. and R, at each balance sheet date.
4. Compute the amount of net debt reduction (measured in dollars) in 1999 and 2000 that
was due solely to exchange rate changes.
5. Explain why the currency in which monetary assets and liabilities are denominated is
relevant to the analysis of ARAs balance sheet.
Aracruz also reports in Brazilian reais, using local GAAP.
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CASE 15-2
EXCHANGE RATE EFFECTS ON OPERATIONS AND FINANCIAL STATEMENTS
EXHIBIT 15C2-1
Aracruz Balance Sheet by Currency, December 31, 1998 ($ in thousands)
Assets
Investment in debt securities
Accounts receivable:
Inventories
Current assets
Property, plant, equipment
Other long-term assets
Total assets
$US
R
$US
$US
R
$US
$US
$ 123,464
29,607
696,404
52,519
21,518
82,942
$1,023,864
$1,030,318
$1,892,451
$1,277,720
$3,200,489
$US
R

Non-debt current liabilities
Total debt
Total liabilities
Minority interest
Stockholders equity
R
$US
R
R
65,515
1,262,876
259,879
$1,644,619
$1,632,889
$1,632,436
$1,567,164
$3,200,489
Source: Data from Aracruz 1998 Annual Report.
6. Exhibit 15C2-2 contains the Aracruz income statement for the year ended December
31, 1998, slightly reformatted. Using the 2000 financial statements, complete Exhibit
15C2-2 for 1999 and 2000.
7. ARA reported a translation loss for 1998 and 1999 and a translation gain for 2000. Discuss whether these amounts are consistent with the balance sheet data in Exhibit 15C2-1.
EXHIBIT 15C2-2
Aracruz Income Statement by Currency, Year Ended December 31, 1998 ($ in thousands)
Revenues: Domestic
Export
Total revenue
Sales taxes
Cost of sales
Other expenses
Total operating cost
Operating income
Financial income
Financial expense
Translation gain (loss)
Other expense (income)
Pretax income
Income tax expense
Minority interest in loss
Net income
Sales volume (000 tonnes): Brazil
Export
Total
Source: Data from Aracruz 1998 Annual Report.
R
$US
$ 38,449
$(462,163
$ 500,612
R
R
R
(39,490)
(349,621)
$(109,657)
$(498,768)
$ 1,844
104,840
(120,955)
(7,780)
$498,1(65)
$ (22,116)
25,306
$(498,257
$ 3,447
68.8
$(.1,085.0
1,153.8
CASE OBJECTIVES
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8. Assume that Aracruz used the Brazilian reai as its functional currency. Discuss the impact on the computation of $U.S.
(i) Total assets
(ii) Stockholders equity
(iii) Reported net income
Your response should explain the principal differences from use of the $U.S. as functional currency and, where possible, the direction of change.
9. Compute the average sales price per tonne in U.S. dollars.
10. Compute the average sales price per tonne in reais (R) for each year using the same
measure as in Question 9 and the appropriate exchange rate.
11. In its press release reporting 2000 results, Aracruz stated that the largest single factor in
its earnings improvement was higher prices of $186 million. Show how that amount
was computed.
12. Compute ARAs operating cost (cost of sales plus other expenses) per tonne in both
U.S. dollars and Brazilian reais. Discuss which measure is more useful as a base for
forecasting future cost levels.
13. Compute ARAs operating margin (net revenue less operating cost) per tonne in both
U.S. dollars and Brazilian reais. Discuss the impact of exchange rate changes on both
measures of operating margin.
14. Forecast 2001 operating income in U.S. dollars for Aracruz using the following
assumptions:
No change in sales volume
No change in $U.S. prices
under each of the following sets of assumptions:
Case I: No change in exchange rates
Operating costs (R/tonne) increase 10% from 2000
Case II: The reai declines by 20% (average for year) against the $U.S.
Operating costs (R/tonne) increase 15% from 2000
For each case, compute operating margin per tonne in both R and $U.S.
15. Discuss the sensitivity of the 2001 forecast to changes in exchange rates and R costs.
Discuss whether these changes are independent.
16. Using your answers to Questions 1 through 15, discuss the expected effect of changes
in the R/$ exchange rate and the price of Aracruz shares:
(i) in R
(ii) in $U.S.
17. Explain why the U.S. dollar is a more appropriate functional currency for ARA than the
Brazilian reai (R).
18. Now assume that Aracruz is a subsidiary of a U.S. company that uses the U.S. dollar as
the functional currency to account for its investment.
(i) Describe the effect of the decline in the Reai on the parents investment in Aracruz
(in $U.S.).
(ii) State where the resulting gain or loss would be reflected in the parents balance
sheet.
(iii) Discuss whether the resulting gain or loss is consistent with your answer to Question 16.
19. Answer Question 18 assuming that the functional currency is the reai.
CASE 15-3
IBM
Analysis of Exchange Rate Effects: Multiple Currencies

INTRODUCTION
IBM is one of the worlds largest multinational corporations, and changes in currency rates have
pervasive effects on the firms financial statements. As IBM provided supplementary data regarding its foreign operations for many years, we can use the company to illustrate the analysis of
multinational corporations.
CASE OBJECTIVES
The objectives of this case are to use IBM to:
1. Show the effects of exchange rate changes in levels and trends of revenue, income, cash
flow, and financial position.
2. Show the effect of exchange rate changes on financial ratios.
3. Calculate the effect of exchange rate changes on assets and liabilities.
4. Calculate translation gains and losses resulting from exchange rate changes.
IBM DISCLOSURES RELATED TO FOREIGN OPERATIONS

Exhibit 15C3-1 contains IBMs balance sheet at December 31, 1989, and 1990. Within the
stockholders equity section, we see translation adjustments of $1,698 and $3,266 billion (4.4
and 7.6% of net assets), respectively. These entries tell us that the company has significant nonU.S. operations and its uses foreign functional currencies. If the company used the U.S. dollar as
the functional currency for all foreign operations, all gains and losses would have been included
in income.
Exhibit 15C3-2 contains IBMs consolidated statement of cash flows for the three years
ended December 31, 1990. The only reference to translation in the cash flow statement is the
effect of exchange rate changes on cash and cash equivalents near the bottom.
Exhibit 15C3-3, which provides the primary raw material for our analysis, is supplementary
data on IBMs non-U.S. operations. Although much of this disclosure is not required (and, unfortunately, rarely provided), it enables us to obtain an understanding of the effect of changing exchange rates on the companys financial condition and operating performance.
The first part of Exhibit 15C3-3 contains summarized balance sheets and income statements
for IBMs non-U.S. operations. These data suggest steady growth in foreign revenue, net earnings, and net assets over the period 1988 to 1990. Comparison of these data with IBMs consolidated balance sheet and income statement indicates that foreign operations accounted for 60%
of revenue for 1990. We return to the analysis of these data shortly.
ESTIMATION OF COMPOSITE EXCHANGE RATES

Before starting our analysis, we need data on the exchange rates that affect IBMs financial
statements. For a company operating in a single currency (such as Foreign Subsidiary, in the
chapter, or AFLAC in Case 15C1-1), we can obtain year-end and average exchange rates covering the period being analyzed. For a multinational such as IBM, we need data on many currencies and a breakdown of IBMs operations by functional currency. The latter is unavailable
(to an external user), and the analysis of many currencies is very time-consuming.1 We need a
shortcut.
In some cases, annual reports for foreign subsidiaries of multinational companies are available, either because of
local filing requirements or subsidiary financing. These reports can shed light on significant foreign operations.
However, these reports are generally prepared in local currencies according to local accounting standards, not in
U.S. dollars under U.S. GAAP. In some cases, reports are available only in the local language, further hampering
use. Nonetheless, when a company has one or a few highly significant foreign subsidiaries, the subsidiary annual report may provide insights not available from the parents consolidated financial statements.
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ESTIMATION OF COMPOSITE EXCHANGE RATES
EXHIBIT 15C3-1.
IBM Balance Sheet
At December 31:
(Dollars in millions)
Assets
Current Assets
Cash
Cash equivalents
Marketable securities, at cost, which approximates market
Notes and accounts receivabletrade, net of allowances
Other accounts receivable
Inventories
Prepaid expenses and other current assets
1990
$ 1,189
2,664
698
20,988
1,656
10,108
1,617
1989
741
2,959
1,261
18,866
1,298
9,463
1,287
38,920
35,875
53,659
26,418
48,410
23,467
27,241
24,943
4,099
17,308
3,293
13,623
21,407
16,916
$87,568
$77,734
$ 3,159
7,602
3,367
3,014
2,506
5,628
$ 2,699
5,892
3,167
2,797
1,365
5,780
25,276
21,700
Long-Term Debt
11,943
10,825
Other Liabilities
3,656
3,420
Deferred Income Taxes
3,861
3,280
Plant, Rental Machines, and Other Property

Less: Accumulated depreciation
Investments and Other Assets:

Software, less accumulated amortization (1990, $5,873; 1989, $4,824)
Investments and sundry assets
Liabilities and Stockholders Equity

Current Liabilities:
Taxes
Short-term debt
Accounts payable
Compensation and benefits
Deferred income
Other accrued expenses and liabilities
Stockholders Equity:
Capital stock, par value $1.25 per share
Shares authorized: 750,000,000
Issues: 1990571,618,795; 1989574,775,560
Retained earnings
Translation adjustments
6,357
6,341
33,234
3,266
30,477
1,698
Less: Treasury stock, at cost (Shares: 1990227,604; 198975,723)
42,857
25
38,516
7
42,832
38,509
$87,568
$77,734
Source: IBM Corporation, 1990 Annual Report.
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CASE 15-3 IBM
ANALYSIS OF EXCHANGE RATE EFFECTS: MULTIPLE CURRENCIES
EXHIBIT 15C3-2.
IBM Statement of Cash Flows
For the Year Ended December 31:
Cash Flow from Operating Activities:
Net earnings
Adjustments to reconcile net earnings to cash provided from operating activities:
Depreciation
Amortization of software
Loss (gain) on disposition of investment assets
(Increase) in accounts receivable
Decrease (increase) in inventory
(Increase) in other assets
Increase in accounts payable
Increase in other liabilities
1990
1989
1988
$ 6,020
$ 3,758
$ 5,806
4,217
1,086
32
(2,077)
17
(3,136)
293
1,020
4,240
1,185
(74)
(2,647)
(29)
(1,674)
870
1,743
3,871
893
(133)
(2,322)
(1,232)
(1,587)
265
519
7,472
7,372
6,080
Cash Flow from Investing Activities:

Payments for plant, rental machines, and other property
Proceeds from disposition of plant, rental machines, and other property
Investment in software
Purchases of marketable securities and other investments
Proceeds from marketable securities and other investments
(6,509)
804
(1,892)
(1,234)
1,687
(6,414)
544
(1,679)
(1,391)
1,860
(5,390)
409
(1,318)
(2,555)
4,734
Net cash used in investing activities
(7,144)
(7,080)
(4,120)
Cash Flow from Financing Activities:

Proceeds from new debt
Payments to settle debt
Short-term borrowings less than 90 daysnet
Payments to employee stock plansnet
Payments to purchase and retire capital stock
Cash dividends paid
4,676
(3,683)
1,966
(76)
(415)
(2,774)
6,471
(2,768)
228
(29)
(1,759)
(2,752)
4,540
(3,007)
1,028
(11)
(992)
(2,609)
(306)
(609)
(1,051)
131
(158)
(201)
153
3,700
(475)
4,175
Net cash provided from operating activities
Net cash used in financing activities

Effects of Exchange Rate Changes on Cash and Cash Equivalents
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents at January 1
708
3,467
Cash and Cash Equivalents at December 31
$ 3,853
$ 3,700
$ 4,175
Supplemental Data:
Cash paid during the year for:
Income taxes
Interest
$ 3,315
$ 2,165
$ 3,071
$ 1,605
$ 3,405
$ 1,440
Fortunately, there are indices of the value of the U.S. dollar against a basket of foreign currencies, normally computed on a trade-weighted basis. Using such a series for IBM requires us
to make the assumption that IBMs business has the same currency mix (distribution over various
currencies) as U.S. trade flows. Although that assumption might be untenable for a smaller company with more limited foreign operations, it appears reasonable for a giant multinational such
as IBM. Exhibit 15C3-4 shows average and year-end exchange rates for the period covered by
our analysis.
W111
BALANCE SHEET EFFECTS
EXHIBIT 15C3-3.
IBM Data on Non-U.S. Operations
Non-U.S. Operations
1990
At end of year:
Net assets employed:
Current assets
Current liabilities
$24,337
15,917
$20,361
12,124
$20,005
11,481
8,420
11,628
9,077
8,237
9,879
6,822
8,524
9,354
5,251
29,125
24,938
23,129
5,060
2,699
2,381
3,358
2,607
1,814
2,340
2,505
1,580
10,140
7,779
6,425
Net assets employed
$18,985
$17,159
$16,704
Number of employees
168,283
167,291
163,904
For the year:

Revenue
$41,886
$36,965
$34,361
Earnings before income taxes

Provision for income taxes
$ 7,844
3,270
$ 7,496
3,388
$ 7,088
3,009
Net earnings
$ 4,574
$ 4,108
$ 4,079
Investment in plant, rental machines,

and other property
$ 3,020
$ 2,514
$ 2,389
Working capital
Plant, rental machines, and other property, net
Investments and other assets
Long-term debt
Other liabilities
1989
1988
1988 net earnings before cumulative effect of accounting change for income taxes.
Non-U.S. subsidiaries which operate in a local currency environment account for approximately 90%
of the companys non-U.S. revenue. The remaining 10% of the companys non-U.S. revenue is from
subsidiaries and branches which operate in U.S. dollars or whose economic environment is highly
inflationary.
As the value of the dollar weakens, net assets recorded in local currencies translate into more U.S.
dollars than they would have at the previous years rates. Conversely, as the dollar becomes stronger,
net assets recorded in local currencies translate into fewer U.S. dollars than they would have at the previous years rates. The translation adjustments, resulting from the translation of net assets, amounted to
$3,266 million at December 31, 1990, $1,698 million at December 31, 1989, and $1,917 million at December 31, 1988. The changes in translation adjustments since the end of 1988 are a reflection of the
strengthening of the dollar in 1989 and the weakening of the dollar in 1990.

Exhibit 15C3-3 states that IBM had non-U.S. net assets of approximately $19 billion. What functional currencies did the company use to account for its foreign operations? The exhibit reports that
non-U.S. subsidiaries which operate in a local currency environment account for approximately
90% of the companys non-U.S. revenue. The remaining 10% . . . is from subsidiaries and branches
which operate in U.S. dollars or whose economic environment is highly inflationary.
W112
CASE 15-3 IBM
EXHIBIT 15C3-4
Dollars Trade-Weighted Exchange
Index, 1988 to 1990 (1973 100)
December 31
Index
1988
1989
1990
92.8
93.7
83.7
Average Rates for Year, 1980 to 1990
Year
Index
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
87.4
103.4
116.6
125.3
138.2
143.0
112.2
96.9
92.7
98.6
89.1
Sources: Economic Report of the President, February 1991 (annual data) and Federal Reserve Bank of St. Louis (December 31 data).
In other words, the local currency is the functional currency for 90% of IBMs foreign operations. The U.S. dollar is the functional currency for the remainder, including subsidiaries operating in hyperinflationary economies.
Assuming that the 90% figure applies equally to the balance sheet, we conclude that IBM
had net assets in nondollar functional currencies of $17.086 billion (90% of total nondollar net
assets of $18.985 billion) at December 31, 1990. The corresponding figures for year-end 1989
and 1988 were $15.443 billion (0.90 $17.159 billion) and $15.034 billion (0.90 $16.704
billion), respectively. These amounts represent IBMs exposure to changes in exchange rates
under SFAS 52.
Translation gains and losses resulting from exchange rate fluctuation have been accumulated as a component of stockholders equity, in accordance with SFAS 52. The text of Exhibit
15C3-3 gives us the cumulative translation adjustments at each year-end:
December 31
Cumulative Translation Adjustments
1988
1989
1990
$1.917 billion
1.698
3.266
These calculations enable us to compute the actual increase in IBMs foreign net assets in functional currencies. By taking the reported change and subtracting the effects of translation
(change in accumulated adjustment), we get the real change ($ in millions):
Year
Reported Translation Real
1989
1990
$ 455
1,826
$ (219)
1,568
$674
258
From the reported change, it appears that IBMs foreign net assets increased more rapidly in
1990 than 1989. The reality is that the large 1990 increase was mostly due to the appreciation
of foreign currencies against the dollar; before translation (in real terms), the 1989 increase was
larger.
W113
The year-to-year change in the cumulative translation adjustment account is the effect of
translation for each year. Compare those changes with IBMs exposure:
$1.698 billion $1.917 billion
1.46%
$15.034 billion
$3.266 billion $1.698 billion
1990:
10.15%
$15.443 billion
1989:
These calculations reveal that the IBM-weighted functional currency composite declined by
1.46% against the dollar in 1989 and rose by 10.15% against the dollar in 1990.2
Turning to our trade-weighted index in Exhibit 15C3-4, we see that the percentage changes
are
1989: 1.0%
1990: 11.9%
These changes approximate the IBM-weighted changes, reassuring us that our index is a good
proxy. But when possible, we use the IBM-weighted index that we have now derived.
First, consider the companys inventories. Exhibit 15C3-3 does not break out non-U.S. inventory, so we must assume that inventories are a constant percentage of current assets.3 At December 31, 1989, consolidated inventories were 26.4% of consolidated current assets (Exhibit
15C3-1). We assume that non-U.S. inventories also were 26.4% of non-U.S. current assets of
$20.361 billion or $5.375 billion, of which $4.838 billion (90%) were in nondollar functional
currencies.
Applying the IBM-weighted exchange rate change of 10.15% results in an estimated increase in non-U.S. inventories of $491 million due to changing exchange rates. This accounts
for most of the $645 million ($10.108 billion$9.463 billion) increase in IBMs consolidated inventories during 1990 (data from Exhibit 15C3-1). These calculations suggest that most of the
1990 inventory increase was due to the impact of changing exchange rates rather than to operating changes.
We can confirm this result from the companys cash flow statement. In Exhibit 15C3-2, we
find that IBMs inventory change, excluding the effect of translation, was a decrease of $17 million, suggesting that the true effect of exchange rate changes was $662 million [$645 million actual change less ($17 million) real change].4
Although our estimated effect of $491 million is not equal to the true effect of $662 million
for 1990, they are not unreasonably far apart. Clearly, our assumptions did not precisely hold.
But even if we did not have the true figure, our estimate would still have told us that IBMs inventory increase in 1990 was mostly due to currency effects rather than operating causes. It is
this conclusion that makes the analysis worthwhile. This technique, although superfluous when
the cash flow statement excludes the impact of exchange rate changes, is useful when cash flow
statements (such as those for non-U.S. firms) are not adjusted to exclude that impact.
We can perform this same analysis for IBMs fixed assets. Exhibit 15C3-3 shows that nonU.S. fixed assets were $9.879 billion; we estimate that $8.891 billion (90% of $9.879 billion)
was in nondollar functional currencies. The estimated effect of currency changes is $902 million
(10.15% of $8.891 billion).
The actual impact of currency changes on fixed assets was disclosed in IBMs 10-K report in
Schedules V and VI. These reconciliations of fixed assets (gross) and accumulated depreciation
reveal that translation increased fixed assets by $963 million ($2,143 million for gross fixed assets less $1,180 million for accumulated depreciation).
Again, our estimate is approximately correct, despite the assumptions required. Consolidated
net fixed assets rose by $2.298 billion in 1990 (Exhibit 15C3-1), or 9.2%. Nearly half the gain resulted from exchange rate changes rather than new investment. Even if the 10-K data had not
been available (Schedules V and VI are no longer required), we would have the same knowledge.
Perceptive readers will note that we have omitted the effect of changing exchange rates on the increase in IBMs
net assets in functional currencies. Given the small change in those assets (in functional currency terms) over the period 1988 to 1990, we have opted for simplification.
3
IBM uses the FIFO inventory method worldwide. For companies with significant LIFO inventories, this calculation
should be made on a FIFO basis by adding back the LIFO reserve (see Chapter 6).
4
This computation, and similar computations in this case, are possible only because IBM made no purchase method
acquisition during 1990. Chapter 14 discusses the impact of purchase method acquisitions on the statement of cash
flows.
W114
CASE 15-3 IBM
INCOME STATEMENT EFFECTS

Turning to the income data (Exhibit 15C3-3), we note that IBM had revenues of $41.886 billion
in currencies other than the dollar, an increase of 13.3% from the 1989 level of $36.965 billion.
On the surface, it appears that the 1990 gain in foreign sales was much larger than the 1989 increase (up 7.6% from the 1988 level of $34.361 billion). However, analysis reveals that exchange rate effects distort the data.
In 1990, non-U.S. sales of $37.697 billion (90% of $41.886) were in operations with nondollar functional currencies (FC) (with the remainder in operations with nondollar local currencies but the dollar as functional currency). These revenues (and all expenses) were translated
into dollars at the average rate for 1990. Using the data in Exhibits 15C3-3 and 15C3-4, we can
compute the effect of rate changes for each year:
($ in millions)
Non-U.S. revenues ($, Exhibit 15C3-3)

Non-$ FC revenues ($, 90%)
% Increase
Dollar index (Exhibit 15C3-4)
FC revenues
% Increase
1988
1989
1990
$34,361
30,925
92.7
FC 28,667
$36,965
33,268
+7.6%
98.6
FC 32,802
+14.4%
$41,886
37,697
+13.3%
89.1
FC 33,588
+2.4%
The last entry, FC revenues, is an artificial index, derived by multiplying estimated non-$ FC revenues by the dollar index.5 The result is a measure of revenue from which the impact of changes
in the value of the dollar has been removed. As a result, we can estimate the real change in
foreign revenues.
We find that the decline in the value of the dollar accounted for most of the gain in foreign
revenues in 1990; the increase is only 2.4% when that factor is removed. Conversely (since the
dollar rose in value in 1989), the real (FC) gain is 14.4% as compared with a gain of 7.6% in
dollars. The rise in the dollar in 1989 resulted in a smaller percentage sales gain in dollars than
local currencies. (These calculations assume that local currency prices were unaffected by exchange rate changes.)
This exercise, therefore, approximates the impact of changing exchange rates on IBMs
nondollar revenues. A similar calculation approximates the effect on net income. IBMs annual
report to shareholders provides virtually no disclosure of this impact.
Exhibit 15C3-5 contains the result of this analysis for the 11-year period 1980 to 1990.6
Comparison of the reported data with the adjusted data reveals differences that are quite
significant.
The year-to-year percentage changes in both revenues and pretax income are, in most
years, quite different after adjustment for changes in the value of the dollar. We have already
5
We must use the index because we do not have average IBM weights, only year-end to year-end data. As we
have shown that the index tracked the IBM weights well, we can use it to examine the trend of revenues and pretax
income.
6
The analysis in Exhibit 15C3-5 uses total non-U.S. sales rather than the proportion for which IBM uses nondollar
functional currencies. This proportion has declined over the 1980 to 1990 period, but the disclosure on this point is
vague. For simplicity and because we believe the analysis would not be significantly affected, we omit that step in
our analysis.
In principle, it is preferable to use only sales in nondollar functional currencies, as in the 1988 to 1990 computations above. Although other foreign sales are also affected by exchange rate changes, there is an important difference. Foreign sales for which the dollar is the functional currency are likely to be in hyperinflationary countries or
where local selling prices are the local currency equivalent of dollar prices. In these cases, changes in exchange rates
may affect volume but do not affect dollar prices; they do not create income statement distortion as discussed in this
section. In addition, the index derived from changes in the cumulative translation adjustment is not applicable to
these situations.
In practice, however, the proportion of sales for which the dollar is the functional currency is rarely available
and, therefore, the analyst must use total foreign sales for analytic purposes.
W115
INCOME STATEMENT EFFECTS
EXHIBIT 15C3-5
Analysis of IBMs Foreign Operations, 1980 to 1990
Year
Revenues
% Change
Pretax Income
% Change
$U.S. 2,772
2,664
3,226
3,841
4,640
5,546
5,871
5,683
7,088
7,496
7,844
3.9%
21.1
19.1
20.8
19.5
5.9
3.2
24.7
5.8
4.6
Reported Data ($U.S. in millions)

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
$U.S. 13,787
13,982
15,336
17,053
18,566
21,545
25,888
29,280
34,361
36,965
41,886
1.4%
9.7
11.2
8.9
16.0
20.2
13.1
17.4
7.6
13.3
Adjusted Data (FC Units in Millions)

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
FC 12,050
14,457
17,882
21,367
25,658
30,809
29,046
28,372
31,853
36,447
37,320
20.0%
23.7
19.5
20.1
20.1
5.7
2.3
12.3
14.4
2.4
FC 2,423
2,755
3,762
4,813
6,412
7,931
6,587
5,507
6,571
7,391
6,989
13.7%
36.6
27.9
33.2
23.7
16.9
16.4
19.3
12.5
5.4
discussed the impact on the period 1988 to 1990. For a broader perspective, we have summarized the data for the entire period:
Percentage Changes in IBM Foreign Results, 1980 to 1990
Revenues
Period
198085
198590
198090
Pretax Income
Reported
Adjusted
Reported
Adjusted
56.3%
94.4
203.8
155.7%
21.1
209.7
100.1%
41.4
183.0
227.3%
11.9
188.4
Source: Data in Exhibit 15C3-5.
Over the entire ten years, the reported and adjusted trends are quite similar. As the dollar
showed a very small increase in value over the period, we conclude that local currency revenue
growth was only slightly greater than revenue growth reported in dollars.
But for the two subperiods, the adjusted data tell a completely different story from the reported data. During the period 1980 to 1985, the value of the dollar rose sharply; the data in Exhibit 15C3-4 show that the average value of the dollar in 1985 was 63.6% higher in 1985 than
1980 (143.0/87.4 1.636). Thus, revenues and earnings in foreign currencies were continuously
devalued when translated into dollars. The growth in revenues during this period was 155.7% in
local currencies, but only 56.3% after translation into dollars. Pretax income was similarly devalued; the local currency growth was 227.3%, whereas the dollar growth was only 100.1%.
The individual year-to-year changes also reflect the impact of the strengthening dollar. In
1981, for example, reported pretax income declined by 3.9%; after adjustment, there was a gain
W116
CASE 15-3 IBM
of 13.7%. In every year during the period 1980 to 1985, the performance of IBMs foreign operations was better in local currencies than U.S. dollars.
During the second half of the decade, 1985 to 1990, the impact of exchange rates reversed.
The value of the dollar declined in most years, and by 1990 it had returned to a level very close
to 1980. The declining value of the dollar inflated foreign currency revenues and income when
translated into dollars.
Over the 1985 to 1990 period, IBMs foreign revenues (in dollars) increased by 94.4%,
higher growth than in the 1980 to 1985 period. The adjusted data suggest that the reverse was
true; IBMs local currency revenues grew by only 21.1% over the second half of the decade, a
marked slowing from the 155.7% growth during the first half.
Although the decline of the dollar was not consistent, some of the individual year data echo
this conclusion. In both 1986 and 1987, foreign revenues (in dollars) rose sharply, suggesting favorable performance trends. The adjusted data show that, for both years, foreign currency revenues declined.
The pretax income data also appear significantly different after adjustment for changes in
the value of the dollar. Over the period 1985 to 1990, foreign pretax earnings rose by 41.4% in
dollars, but declined by 11.9% in local currencies. The years 1986 and 1990 are the clearest examples of this effect in individual years: In both cases, pretax income rose in dollars but declined in local currencies.
It is important to caution, however, that this analysis makes a crucial assumptionthat
IBMs foreign operations were unaffected by exchange rate changes. For some firms, selling
prices (and, therefore, revenues and earnings) are affected by variations in exchange rates,
which impact the cost of imported components, and the prices of competitive products. We
cannot assume that local currency results are always independent of exchange rates.
Nonetheless, it is apparent that the rising value of the dollar during the 1980 to 1985 period
disguised the excellent performance of IBMs foreign operations. It is equally clear that the dollar decline during the second half of the decade masked the deterioration of the operating performance of the companys foreign subsidiaries.
These conclusions show that analysis of a multinational enterprise is seriously deficient unless the impact of changing exchange rates is taken into account. Despite the approximations
and assumptions required, the analyst gains important insights into operating trends and can use
these to question management more perceptively about its real operating performance.
RATIO EFFECTS
The impact of foreign currency changes on IBMs financial ratios is hard to determine because
of inadequate data. Since IBM uses functional currencies other than the U.S. dollar for 90% of
its non-U.S. operations, we can conclude that income statement ratios in dollars largely replicate the local currency data. This would also be true of ratios using only balance sheet data,
such as the current or debt-to-equity ratios.
The increased importance of foreign operations in 1990, resulting from the weakness of the
dollar, gave foreign operations more weight in the consolidated total in 1990 than 1989. Without details of the income statement and balance sheet for foreign operations, we cannot easily
tell which ratios are improved (or worsened) by this effect.7
CONCLUDING COMMENTS
As stated at the outset, the analysis of IBM was made possible by the voluntary disclosures (the
first part of Exhibit 15C3-3) regarding its non-U.S. operations. Few companies provide similar
data; IBM stopped providing extensive disclosures after its 1991 Annual Report. Why, then,
have we devoted a case to this analysis?
Our major objective is to illustrate how changing currency rates distort financial statements
in the context of a real company. The analysis issues exist for all companies with significant foreign operations. Our goal is to enable analysts and other readers of this text to apply portions of
this analysis of IBM to other companies.
7
By using cash flow data and the technique previously employed to estimate the effect of exchange rate changes on
various balance sheet and income accounts, we can approximate ratios for IBMs foreign operations.
CONCLUDING COMMENTS
W117
Required:
Note: Make the simplifying assumption that IBM uses local currencies as the functional currency
for all foreign subsidiaries.
1. Using Exhibit 15C3-3, the balance sheet and income statement for IBMs non-U.S. operations after translation to U.S. dollars:
(a) Convert the 1989 and 1990 balance sheets to FC units.
(b) Convert the 1990 income statement to FC units.
(c) Using only FC net income, try to reconcile the change in FC equity (net assets) during 1990. Provide one possible reason for the discrepancy.
2. Exhibit 15C3-3 states that IBM invested $3,020 million in plant, rental machine, and
other properties during 1990. Calculate the amount in FC units. Using this result, estimate depreciation expense (in FC units) for IBMs non-U.S. operations.
3. [Cash flow analysis of IBM foreign operations]
(a) Assume that cash is 5% of the current assets shown in Exhibit 15C3-3. Prepare a
1990 cash flow statement in FC units for IBMs non-U.S. operations.
(b) Convert the FC unit cash flow statement prepared in part (a) to a U.S. dollar cash
flow statement.
(c) (i) Compute the percentage of IBMs 1990 consolidated cash from operations that
came from its non-U.S. operations.
(ii) Compute the percentage of IBMs 1990 consolidated borrowings made by its
non-U.S. operations.
(iii) Compute the percentage of IBMs 1990 investment in fixed assets that took
place in its non-U.S. operations.
(iv) Discuss how your answers to parts (i) through (iii) contribute to your understanding of the importance of IBMs non-U.S. operations to the company.
(v) Discuss the limitations of your answers to parts (i) through (iii).
(d) Using the cash flow data calculated in part (c) estimate the effect of exchange rate
changes on cash and cash equivalents. Compare your results to the amount shown
in IBMs statement of cash flows (Exhibit 15C3-2).

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CASE 1-1

Analysis of Contingent Obligation: Bristol-Myers Squibb

EXHIBIT 1C1-1. BRISTOL-MYERS SQUIBB

EXHIBIT 1C1-2. BRISTOL-MYERS SQUIBB

Breast Implant Litigation

*Continuing operations, using restated data from 2000 annual report

ANALYSIS OF CONTINGENT OBLIGATION: BRISTOL-MYERS SQUIBB

1999 REVENUE RECOGNITION

REVENUE AND EXPENSE RECOGNITIONORTHODONTIC CENTERS OF AMERICA

Source: footnote 2 to 2000 financial statements.

1999 REVENUE RECOGNITION

EXHIBIT 2C-1. ORTHODONTIC CENTERS OF AMERICA

Years Ended December 31

(Amounts in $ Thousands, Except Per Share Data)

Diluted earnings per share

Provision for bad debt expense

*Before cumulative effect of accounting changes

Pro Forma for 2000 Accounting Change

Balance Sheet Data

Net of allowance for uncollectibles of $5,356 in 1998 and $6,403 in 1999

REVENUE AND EXPENSE RECOGNITIONORTHODONTIC CENTERS OF AMERICA

CASH FLOW ANALYSISORTHODONTIC CENTERS OF AMERICA [OCA]

EXHIBIT 3C-1. ORTHODONTIC CENTERS OF AMERICA

Years Ended December 31

Repayment of notes payable to affiliated orthodontists and long-term debt

Foreign currency translation adjustment

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Transactions with Orthodontic Entities

CASH FLOW ANALYSISORTHODONTIC CENTERS OF AMERICA [OCA]

EXHIBIT 3C-1 (continued)

Earnings per share

Statement of Cash Flows

Source: Nucor Annual Reports, 19941999

INVENTORY ANALYSIS OF NUCOR

Corporate Financial Data

*Before accounting changes

Cash from operations

Total R & D Expense*

*IPRD included in expense

Statement of Cash Flows

*Pro forma for debt conversion and related transactions.

Income Statement Data

Includes PPE write-downs

Cash Flow Data

Includes capital expenditure

Source: Read-Rite data from 19982000 annual reports.

ANALYSIS OF DEBT CAPITALIZATION: READ-RITE

EXHIBIT 11C-1. CALTEX GROUP OF COMPANIES

Income in equity affiliates

Income before income taxes

Liabilities and Equity

Caltex Australia Limited

OFF-BALANCE-SHEET FINANCING TECHNIQUES FOR TEXACO AND CALTEX

EXHIBIT 11C-1 (continued)

EXHIBIT 11C-2. TEXACO AFFILIATES: EQUILON AND MOTIVA

Sales and other operating revenue

Condensed Consolidated Balance Sheet

OFF-BALANCE-SHEET FINANCING TECHNIQUES FOR TEXACO AND CALTEX

EXHIBIT 11C-2 (continued)

From Coke to Enterprises

(Continued on page W90.)

COCA-COLA: CONSOLIDATION VERSUS EQUITY METHOD

EXHIBIT 13C1-1. THE COCA-COLA COMPANY AND COCA-COLA ENTERPRISES

Property, Plant, and Equipment (Net)