Franchesca B.

Mendiola February 19, 2018

20160152 Financial Analysis & Reporting

Case 2.1: Intel Case

(a) Prepare a common-size balance sheet for all years presented.

(b) Describe the types of assets owns. Which assets are the most significant to the
company? Using notes to the financial statements, discuss the accounting methods
used to value assets. What other information can be learned about the asset accounts
from the notes? Have there been significant changes to the asset structure from 2015 to
2016?
- The assets that the Intel Corporation owns under current assets are cash and cash
equivalents, short-term investments, trading assets, accounts receivable, inventories,
assets held for sale, and other current assets. Under non-current assets are property,
plant and equipment, marketable equity securities, goodwill, other long-term
investments, identified intangible assets and other long-term assets. The most significant
assets to the company are cash and short-term investments, property, plant and
equipment, long-term investments and goodwill.
- The methods used to value assets are underlined by the implications for tax payments
and cash flows. The valuation technique used by the company is mostly fair value
method. The fair value of the asset is calculated and the valuation is done accordingly,
like what was done in trading assets & available-for sale invested. Non-marketable
equity securities are accounted for at historical cost, or, if Intel has significant influence
over the investee, the equity method is used. Inventories are valued using current
average or First-in First-out basis (FIFO). For financial reporting purposes, straight line
depreciation is used for depreciating property, plant and equipment.
- Other information that can be learned about the asset accounts from the notes are
supplementary information to financial statements that explain the firm’s accounting
policies and provide detail about particular accounts such as Intel’s many investments,
derivative financial instruments, breakdown of the inventory account, work in process
and finished goods, details of the property plant and equipment account, estimated
useful lives of plant and equipment, goodwill and other intangible assets.
- The asset structure has changed throughout 2015 and 2016. Cash and Cash
Equivalents rapidly decreased from 15.09% to 4.91%. This is because of the increase in
their use of cash, especially in the classification of “Acquisitions” - they acquired more
investments. This is due to proceeds from debt issuances and the repayment of $1.5
billion of debt in 2016. The $2.8 billion increase in cash provided by operating activities
was due to adjustments for non-cash items and changes in working capital, partially
offset by lower net income. The adjustments for non-cash items were higher in 2016
primarily due to restructuring and other charges and the change in deferred taxes,
partially offset by lower depreciation expense. Income taxes paid, net of refunds, in 2016
compared to 2015 were $2.6 billion lower due to bonus depreciation on capital assets
placed in service, as well as timing of certain tax payments and refunds. Assets held for
sale increased from 0.07% to 4.60%, which means there are more assets which aren’t
abandoned and have prospective buyers. Other long term investments increased from
1.86% to 4.16%.

(c) Analyze the accounts receivable and allowance for doubtful accounts.
- The accounts receivables of the company are few because the revenue of the company
is recognised when the earnings process is complete, thus at that time the accounts
receivable reduce. The accounts receivable and the allowance for doubtful accounts
have decreased, but not drastically. Intel records pricing allowances, including discounts
based on contractual arrangements with customers, when revenue is recognized as a
reduction to both accounts receivable and net revenue.
(d) Describe the types of liabilities Intel has incurred. Which liabilities are the most
significant to the company? Have there been significant changes to the liability and
equity structure from 2015 to 2016?
- The liabilities that the company majorly incurs consist of long-term liabilities. Most
significant to the company are the non-current liabilities which is long term debt, which is
why more emphasis is laid on it. The liability and equity structure from 2015 to 2016 has
increased but not drastically.

(e) Describe the commitments and contingencies of Intel.

(Note 20: Commitment and Contingencies)
- According to Intel, portions of their capital equipment and certain facilities are under
operating leases that expire at various dates through 2058. Additionally, portions of their
real property are under leases that expire at various dates through 2017. Rental
expense was $282 million in 2016 ($253 million in 2015 and $257 million in 2014).
- “Commitments for construction or purchase of property, plant and equipment totaled
$7.5 billion as of December 31, 2016 ($5.7 billion as of December 26, 2015), a
substantial majority of which will be due within the next 12 months. Other purchase
obligations and commitments totaled approximately $3.0 billion as of December 31,
2016 (approximately $4.0 billion as of December 26, 2015). Other purchase obligations
and commitments include payments due under various types of licenses and
agreements to purchase goods or services, as well as payments due under non-
contingent funding obligations. In addition, we have various contractual commitments
with Micron and IMFT. For further information on these contractual commitments, see
“Note 9: Investments.”
- Intel is subject to loss contingencies, including various legal and regulatory proceedings,
asserted and potential claims, liabilities related to repair or replacement of parts in
connection with product defects, as well as product warranties and potential asset
impairments that arise in the ordinary course of business. An estimated loss from such
contingencies is recognized as a charge to income if it is probable that a liability has
been incurred and the amount of the loss can be reasonably estimated. Judgment is
required in both the determination of probability and the determination as to whether a
loss is reasonably estimable as a critical accounting estimate. They review the status of
each significant matter quarterly and they may revise their estimates.

(f) Under which classification(s) are deferred taxes listed? What item is the most significant
component of deferred taxes?

- Intel Corporation classified all deferred tax assets and liabilities as non-current on the
consolidated balance sheet instead of separating deferred taxes into current and non-
current. They measure deferred tax assets and liabilities using the currently enacted tax
rates that apply to taxable income in effect for the years in which those tax assets are
expected to be realized or settled. As seen in the notes, the following are significant
components of Intel’s deferred tax assets and liabilities at the end of each period:
 (g) What equity accounts are included on the balance sheet of Intel?
- The equity accounts included in the balance sheet of Intel are stocks, shares,
accumulated other comprehensive income (loss), and retained earnings.

Case 2.2: Applied Materials Comprehensive Analysis Case Using the Financial Statement
Analysis Template

(a) Open the financial statement analysis template that you saved from Chapter 1 Applied
Materials problem and input the data from the Applied Materials balance sheet. Be sure
to read the notes to the financial statements to determine the correct numbers to input
on the template. For example, the company has combined asset and liability accounts
and property, plant and equipment has been recorded net of accumulated depreciation.
See Note 7 to help you re-organize the data for the template. When you have finished
inputting the data, review the balance sheet to make sure there are no red blocks
indicating that your numbers do not match the cover sheet information you input from the
Chapter 1 problem. Make any necessary corrections before printing out both your input
and the common-size balance sheet that the template automatically creates for you.

October 25, 2015 October 25, 2016

(b) Analyze the balance sheet. Write a summary that includes important points that an
analyst would use in assessing the financial condition of Applied Materials.
- As we can see, both total assets and total liabilities and stockholder’s equity haven’t
changed drastically. Not much change is seen.