Medtronic Case Questions: Medtronic Inc.

2014 Annual Report

Below are a series of questions to answer connected with Medtronics 2014 annual report. You
should use the financial statements and footnotes directly obtained from the Medtronic annual
report (i.e., not Mergent, Yahoo! Finance or other sources) as other sources may not be accurate.
1. Revenue Recognition
How many days does it currently take Medtronic to turn products into cash? Part of Medtronics
revenue is recognized when a medical device is actually implanted in a patient (see Footnote 1).
Suppose management wishes to reduce the average inventory holding period to 140 days in order
to improve its cashflow management. Management believes this can be achieved by changing
the revenue recognition policies so that revenue is recorded when the medical device is delivered
to the hospital rather than being implanted in a patient.
Assuming no change in 2014 COGS or 2013 ending inventory, what would the 2014 ending
inventory balance need to be in order to achieve this goal? Would this change in revenue
recognition improve the stated goal of decreasing the time required to turn a product into a cash
collection? Explain your answer.
2. Inventory
The Company currently uses the FIFO inventory method (see Footnote 1). Suppose the ending
LIFO inventory values are $1,575 million and $1,612 million for 2014 and 2013, respectively.
Management is interested in whether they should adopt LIFO and has asked you for your
recommendation. Prepare an analysis of whether LIFO would benefit shareholders. Your
analysis should consider both the impact on COGS and net income as well as cashflows. Which
method do you recommend the Company use and why?
(Note: net income is an after tax number. Using the terminology of the course, net income is
earnings before taxes less income taxes. )
3. Property, Plant and Equipment
For a company like Medtronic, an adequate capital budget is crucial for maintaining the capital
base of the Company. Below are a series of questions to help determine the average age of the
Companys capital base and capital budget plan. Does Medtronic use straight-line or an
accelerated depreciation method for reporting purposes? How can you tell? What is the
depreciation expense for reporting purposes for 2013 and 2014? Where did you get these
numbers? Using this information, calculate the average age of the PPE for 2013 and 2014. What
are capital expenditures for property, plant and equipment for 2013 and 2014?

4. Allowance for Doubtful Accounts

The Company sells to customers on credit. For Fiscal 2014, the Company has reported $3.811
billion as the amount for accounts receivable. What does this amount represent? What is the
actual amount in the accounts receivable account? Where did you get this information? Suppose
management is worried about the potential credit worthiness of its customers and determines that
the allowance account should have been $250 million at the end of Fiscal 2014. What would the
impact of this change be on net income and basic earnings per share?
5. Intangibles and Intellectual Property
Footnote 4 details acquisitions that Medtronic has made. In fiscal 2014 the company acquired
another company called Cardiocom. What was the purchase price? What percentage of this
purchase price is represented by intangible assets? Please explain how this transaction affected
the 2014 income statement as well as various assets and liabilities on Medtronics Balance Sheet.
6. Footnotes 6 and 7 provide details on goodwill amounts. What was the total amount of
goodwill on the balance sheet in 2014? What was the total amount of goodwill impairment
reported by Medtronic?
7. Taxes
For 2014, what is the provision for income taxes (or tax expense per books)? What part are
current taxes and what part are deferred taxes? The cumulative effects of the individual
differences between taxes per book and per tax return are summarized in Footnote 13. Explain
how a deferred tax asset is created when the Company records an estimate for credit losses.
8. Contingencies
Footnote 1 deals with disclosures for contingencies and commitments. Because of its products,
the Company has significant obligations for product warranties. Based on the information
provided in the footnote, what was the total amount paid for warranty claims in Fiscal 2014?
What is the outstanding balance that has been set aside to pay for future claims?
9. Financing
Footnote 8 details the financing arrangements that the company has engaged in. What
proportion of the companys debt is short-term and what proportion is long term? Describe the
change in the debt structure of the company during 2014. What adjustment would the company
have to make if they were to convert the operating leases to capital leases (see footnote 15)?
10. Investments
Medtronic has a substantial investment portfolio. What portion of 2014 securities (including
Other Assets) is held with the intent to sell the securities in the near future, but not to actively
trade in the securities? What are the net gains/losses on this portion of the portfolio? What

proportion of all securities being valued at fair value have had their values determined using
prices obtained from identical securities trading in an active market?