Revenue and Related Balance Sheet Concepts » What’s Behind the numbers » Receivables » Exercises
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S O L U T I O N S
rv.wbn.rec.020 Recording entries using company disclosures, determining their
financial-statement effects and analyzing related risks (HP)
This exercise asks you to record entries based on HP’s disclosures and then determine
how these entries affected HP’s financial statements. The entries should be recorded using
the accounts on page 5. HP’s financial statements and Valuation and Qualifying Accounts
(Schedule II of 10K) are on pages 6-10.
Part I: Record Entries
Record Keeping
This exercise helps
you learn how to
do record keeping
and reporting.
Simplifying Assumptions
■ Assume for the purpose of this question that HP’s allowance for doubtful accounts
is only affected by bad debts and, in particular, that the effects of product returns,
sales rebates and other programs offered to customers are immaterial or non-existent. This is likely a reasonable assumption: HP only mentions customer returns
once in its 2012 10-K (page 84) and Schedule II reports “Addition of bad debt
provision,” suggesting most, if not all, of the provision is attributable to bad debts.
■ Assume for the purpose of this question that HP writes off the gross margin associated with receivables secured by collateral before recording the recovery of the
returned property. For example, if a customer originally purchased a product for
$100 on account with $70 cost of sales and HP writes off the account, it records
two entries:
(i) writes off the $30 portion of the $100 receivable associated with the margin
when it decides the account is not collectible and
(ii) writes off the remaining $70 receivable when the collateral is recovered.
The first entry is the only one that affects the allowance and the only one you are to
record here. In terms of wording in HP’s Schedule II, the $30 recorded in entry (i)
writes off the $100 receivable, net of the $70 recovery: the allowance would report
a $30 “Deduction, net of recoveries.”
Guidance
■ The chart of accounts includes one bad debt expense account. Record the combined expense for accounts receivable and financing receivables into this account.
■ HP’s balance sheet reports financing receivables as current and non-current
assets. This means HP maintains separate current and non-current accounts for
gross financing receivables and for the allowance for bad debts. However, HP’s
Valuation and Qualifying Accounts (Schedule II) doesn’t report separate current
and non-current allowances. This means you can’t perfectly replicate HP’s related
entries (into current and non-current accounts). Instead, as indicated in the chart
of accounts, you are to record entries into fictitious accounts that combine the current and non-current effects. For example, you will record the bad debt expense
associated with current and non-current financing receivables into a single allowance for financing receivables.
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2
NAVIGATING ACCOUNTING®
Required
(a) Record a journal entry that recognizes HP’s bad debts expense for the year ended
October 31, 2012. Write your entry in the space below using the accounts on page 5.
Replenish bad debt allowance
Debit
Bad debt expense: accounts receivable & financing receivables
Allowance for bad debts: accounts receivable
Allowance for bad debts: financing receivables
Credit
$142
$100
$42
(b) Record a journal entry that recognizes HP’s write-offs (net of recoveries) of receivables (accounts and financing) for the year ended October 31, 2012. Follow the
guidance for part (a).
Write off bad debts (net of recoveries)
Allowance for bad debts: accounts receivable
Allowance for bad debts: financing receivables
Accounts receivable, gross
Financing receivables, gross
Debit
Credit
$106
$23
$106
$23
Part II: Financial-Statement Effects of Entries
Required
For the entries you recorded in Part I, complete the related table identifying the HP
financial statement line items that would have been directly affected (and the direction of
the effects) during the year ended October 31, 2012.
Choose the most appropriate line items on HP’s financial statements. As indicated in
the guidance for Part I (a), HP doesn’t disclose enough information to record separate
amounts for the current and non-current accounts related to financing receivables.
However, even though we combined the current and non-current accounts in Part I,
here we want you to assume you recorded them separately. That is, you are to identify the
line items that were affected when HP wrote off receivables using current and non-current
accounts for financing receivables.
Guidance:
(1) Determine the appropriate line item(s) affected using HP’s financial statements
on pages 6-9 For example, write “cash and cash equivalents” rather than “cash”
because this is on HP’s balance sheet.
(2) Include line item(s) directly affected, including the effect(s) of closing entries for
events affecting income. Ignore taxes.
(3) Don’t include totals or sub-totals indirectly affected by the entry. For example,
don’t report “net income” on the income statement. However, net income is
NOT a total on the statement of shareholders’ equity.
(4) Three or four lines were included below for each statement, but you may need
none or more than one line. Write “NONE” if no line item is effected on the
statement.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
3
EXERCISE
(5) Indicate if the effect(s) of the entries associated with the event increased or decreased the line item. Put
an X in the appropriate column if the above event increases or decreases that line item. Be sure to mark
only one box in each statement’s row. NOTE: If a reported negative number changes from -2 to -3, it
decreases; if it changes from - 2 to - 1, it increases.
(c) Replenishing the allowances:
Replenish bad debt allowance
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF INCOME
Increases
Decreases
X
Accounts receivable
Line Items
Selling, general and administrative
Increases
Decreases
X
(Reported positive number increases.)
Financing receivables: current
X
Long-term financing receivables and other assets
X
Retained earnings
X
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Line Items
Increases
Decreases
X
Net loss
(Reported negative number becomes more negative.)
STATEMENT OF CASH FLOWS
Line Items
Increases
X
Net (loss) earnings
Provision for doubtful accounts accounts and
financing receivables
Decreases
X
(d) Writing off receivables:
Write off bad debts (net of recoveries)
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF INCOME
Increases
Decreases
NONE
Line Items
Increases
Decreases
Increases
Decreases
NONE
(Alternatively, offsetting effects within accounts and financing receivables.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Line Items
Increases
Decreases
NONE
STATEMENT OF CASH FLOWS
Line Items
NONE
(Alternatively, offsetting effects within accounts and financing receivables.)
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
4
NAVIGATING ACCOUNTING®
Part III: Risk comparisons
Required
(e) Note 11 of HP’s 2012 10-K reports $7,693 of gross financing receivables (current and non-current) at the
end of fiscal 2012 with an allowance for doubtful accounts of $149 (page 122). Thus, the allowance is 1.94%
of gross financing receivables. HP’s balance sheet reports $16,407 of accounts receivable at the end of fiscal 2012 and the Valuation and Qualifying Allowances table (Schedule II) reports $464 of related allowance
for doubtful accounts. Thus, gross accounts receivable were $16,871 and the allowance was 2.75% of gross
accounts receivable. This suggests the credit risk associated with accounts receivable was slightly greater
than the risk associated with the financing receivables.
Based solely on the following background information and concepts covered thus far, hypothesize two reasons accounts receivable may have been riskier than financing receivables.
Background information
The following quotes are from HP’s 2012 10-K (trade receivables are the same as accounts receivable):
“Moreover, some of our wholesale and retail distributors may have insufficient financial resources and may
not be able to withstand changes in business conditions, including economic weakness and industry consolidation. Many of our significant distributors operate on narrow product margins and have been negatively
affected by business pressures. Considerable trade receivables that are not covered by collateral or credit
insurance are outstanding with our distribution and retail channel partners.” (Page 26)
“HP sells a significant portion of its products through third-party distributors and resellers and, as a result,
maintains individually significant receivable balances with these parties. If the financial condition or operations of all of these distributors’ and resellers’ aggregated accounts deteriorate substantially, HP’s operating
results could be adversely affected. The ten largest distributor and reseller receivable balances, which were
concentrated primarily in North America and Europe, collectively represented approximately 14% of gross
accounts receivable at both October 31, 2012 and October 31, 2011. No single customer accounts for more
than 10% of accounts receivable. Credit risk with respect to other accounts receivable and financing receivables is generally diversified due to the large number of entities comprising HP’s customer base and their
dispersion across many different industries and geographical regions. HP performs ongoing credit evaluations of the financial condition of its third-party distributors, resellers and other customers and requires collateral, such as letters of credit and bank guarantees, in certain circumstances. The past due or delinquency
status of a receivable is based on the contractual payment terms of the receivable.” (Page 88)
“Financing receivables represent sales-type and direct-financing leases resulting from the placement of HP
and third-party products. These receivables typically have terms from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables
from operating leases.” (Page 122)
Solution considerations
While there may be other reasons accounts receivable was slightly riskier than financing receivables at the end
of fiscal 2012, here are two than seem to be particularly plausible:
(1) Collateral: The financing receivables are all associated with leases and thus are collateralized by the leased
property. By contrast, the excerpts above suggest that “considerable trade receivables are not covered by
collateral or credit insurance,” indicating they are riskier.
(2) Different debtors: Based on the limited information above, it seems reasonable to conclude that the debtors associated with accounts receivable are primarily third-party distributors and resellers. For example,
Avnet is a distributor and Best Buy, Staples, and smaller companies are resellers. By contrast, most of the
financing receivables debtors are likely consumers or companies that are customers of the distributors
and resellers who lease HP products (or other companies’ products financed by HP). The above excerpts
suggests specific risks associated with distributors and resellers, which may be more significant than the
credit risks associated with consumers. Regardless, the risks associated with the financing receivables are
likely more diversified than those associated with accounts receivable, because the pool is larger and more
diverse.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
5
EXERCISE
CHART OF ACCOUNTS
ASSETS
Current
AR
Accounts receivable
ARG
Accounts receivable, gross
ARall
Allowance for bad debts: accounts receivable
C
Cash and cash equivalents
Inven
Inventories
PrEx
FGI
Finished goods inventories
SIdr
Segregated inventories: deferred revenue
Prepaid expenses
Current and non-current combined
(Fictitious accouts that allow outsiders to record related entries using footnote information.)
FR
Financing receivables
(current and non current combined)
FRG
Financing receivables, gross
FRall
Allowance for bad debts: financing receivables
Non-current
PPE
Property, plant, and equipment, net
PPEhc
PP&E (historical cost)
AcDep
Accumulated depreciation
LIABILITIES
Current
AP
Accounts payable
AcrL
Accrued liabilities
DivP
Dividend payable
Drev
Deferred revenue
Non-current
LTD
Long-term debt
OWNERS' EQUITY
Permanent
RE
Retained earnings
SCap
Share capital
Net income
BadEx
Bad debt expense: accounts receivable & financing receivables
CGS
Cost of goods sold
DepEx
Depreciation expense
G/L
Gain/loss
PPEGL
Gain/Loss on PP&E disposals
ONOGL
Other non-operating gains/losses
IncS
Income summary
MSGA
Miscellaneous SG&A expense
Rev
Revenues, net
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
6
NAVIGATING ACCOUNTING®
HEWLETT PACKARD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
October 31
2012
2011
In millions, except
par value
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
Financing receivables
Inventory
Other current assets
Total current assets
Property, plant and equipment
Long-term financing receivables and other assets
Goodwill
Purchased intangible assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings
Accounts payable
Employee compensation and benefits
Taxes on earnings
Deferred revenue
Accrued restructuring
Other accrued liabilities
Total current liabilities
Long-term debt
Other liabilities
Commitments and contingencies
Stockholders' equity:
HP stockholders' equity
Preferred stock, $0.01 par value (300 shares authorized; none issued)
Common stock, $0.01 par value (9,600 shares authorized; 1,963 and
1,991 shares issued and outstanding, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total HP stockholders' equity
Non-controlling interests
Total stockholders' equity
Total liabilities and stockholders' equity
$11,301
16,407
3,252
6,317
13,360
50,637
11,954
10,593
31,069
4,515
$108,768
$8,043
18,224
3,162
7,490
14,102
51,021
12,292
10,755
44,551
10,898
$129,517
$6,647
13,350
4,058
846
7,494
771
13,500
46,666
21,789
17,480
$8,083
14,750
3,999
1,048
7,449
654
14,459
50,442
22,551
17,520
20
20
6,454
21,521
(5,559)
22,436
397
22,833
$108,768
6,837
35,266
(3,498)
38,625
379
39,004
$129,517
Hewlett Packard 2012 10K, sec.gov
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
7
EXERCISE
HEWLETT PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
For the fiscal years ended October 31
2012
2011
2010
In millions, except per share amounts
Net revenue:
Products
$77,887
$84,757
$84,799
Services
42,008
42,039
40,816
462
449
418
120,357
127,245
126,033
Cost of products
59,468
65,167
65,064
Cost of services
32,600
31,945
30,486
Financing income
Total net revenue
Costs and expenses:
Financing interest
Research and development
Selling, general and administrative
Amortization of purchased intangible assets
Impairment of goodwill and purchased intangible assets
Restructuring charges
Acquisition-related charges
Total operating expenses
(Loss) earnings from operations
Interest and other, net
(Loss) earnings before taxes
317
306
302
3,399
3,254
2,959
13,500
13,577
12,822
1,784
1,607
1,484
18,035
885
2,266
645
1,144
45
182
293
131,414
117,568
114,554
9,677
11,479
(11,057)
(876)
(11,933)
(695)
(505)
8,982
10,974
(1,908)
(2,213)
($12,650)
$7,074
$8,761
Basic
($6.41)
$3.38
$3.78
Diluted
($6.41)
$3.32
$3.69
Provision for taxes
(717)
Net (loss) earnings
Net (loss) earnings per share:
Weighted-average shares used to compute net (loss) earnings per share:
Basic
1,974
2,094
2,319
Diluted
1,974
2,128
2,372
Hewlett Packard 2012 10K, sec.gov
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
8
NAVIGATING ACCOUNTING®
HEWLETT PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Common Stock
Number of
Shares
Par
Value
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Total HP
Stockholders'
Equity
Noncontrolling
Interests
($3,247)
$40,517
$247
Total
In millions, except number of shares in thousands
Balance October 31, 2009
2,364,809
$24
$13,804
Net earnings
Other comprehensive loss
$29,936
8,761
(590)
Comprehensive income
Issuance of common stock in connection
80,335
1
2,606
(241,246)
(3)
(5,809)
$40,764
8,761
(590)
8,761
(590)
8,171
8,171
2,607
2,607
(11,071)
(11,071)
with employee stock plans and other
Repurchases of common stock
Net excess tax benefits from employee stock plans
Cash dividends declared
(743)
Stock-based compensation expense
Changes in non-controlling interest
Balance October 31, 2010
(5,259)
300
668
2,203,898
$22
$11,569
Net earnings
Other comprehensive income
$32,695
($3,837)
7,074
339
45,461
1
(258,853)
(3)
300
(743)
(743)
668
Comprehensive income
Issuance of common stock in connection
300
751
$40,449
85
668
85
$332
$40,781
7,074
339
7,074
339
7,413
7,413
752
752
with employee stock plans and other
Repurchases of common stock
Net excess tax benefits from employee stock plans
(6,296)
Cash dividends declared
(9,968)
(834)
Stock-based compensation expense
Changes in non-controlling interest
Balance October 31, 2011
(3,669)
128
685
1,990,506
$20
$6,837
Net loss
Other comprehensive loss
$35,266
682
(834)
47
685
47
$379
$39,004
($3,498)
$38,625
(2,061)
(12,650)
(2,061)
(12,650)
(2,061)
(14,711)
(14,711)
(12,650)
39,068
128
(834)
685
Comprehensive loss
Issuance of common stock in connection
(9,968)
128
1
683
683
with employee stock plans and other
Repurchases of common stock
(66,736)
(1,525)
Net excess tax benefits from employee stock plans
Cash dividends declared
(1,626)
(995)
Stock-based compensation expense
Changes in non-controlling interest
Balance October 31, 2012
(101)
(175)
635
1,962,838
$20
$6,454
(1,626)
(175)
(175)
(995)
(995)
635
$21,521
($5,559)
$22,436
18
635
18
$397
$22,833
Hewlett Packard 2012 10K, sec.gov
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
9
EXERCISE
HEWLETT PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the fiscal years ended October 31
2012
2011
2010
In millions
Cash flows from operating activities:
Net (loss) earnings
$
(12,650)
$
7,074
$
8,761
Adjustments to reconcile net (loss) earnings
to net cash provided by operating activities:
Depreciation and amortization
Impairment of goodwill and purchased intangible assets
5,095
4,984
4,820
18,035
885
Stock-based compensation expense
635
685
668
Provision for doubtful accounts accounts and financing receivables
142
81
156
Provision for inventory
277
217
189
Restructuring charges
2,266
645
1,144
(711)
166
197
Excess tax benefit from stock-based compensation
(12)
(163)
(294)
Other, net
265
(46)
169
Deferred taxes on earnings
Changes in operating assets and liabilities:
Accounts and financing receivables
Inventory
Accounts payable
Taxes on earnings
Restructuring
Other assets and liabilities
Net cash provided by operating activities
1,269
(227)
(2,398)
890
(1,252)
(270)
(1,414)
275
(698)
(320)
610
723
(840)
(1,002)
(2,356)
(293)
(1,334)
89
10,571
12,639
11,922
(3,706)
(4,539)
(4,133)
Cash flows from investing activities:
Investment in property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchases of available-for-sale securities and other investments
617
999
602
(972)
(96)
(51)
Maturities and sales of available-for-sale securities and other investments
662
68
200
Payments in connection with business acquisitions, net of cash acquired
(141)
Proceeds from business divestiture, net
(10,480)
87
Net cash used in investing activities
(8,102)
89
(3,453)
125
(13,959)
(11,359)
Cash flows from financing activities:
(Payments) issuance of commercial paper and notes payable, net
(2,775)
(1,270)
4,156
Issuance of debt
5,154
11,942
3,156
Payment of debt
(4,333)
(2,336)
(1,323)
Issuance of common stock under employee stock plans
716
Repurchase of common stock
(1,619)
Excess tax benefit from stock-based compensation
Net cash used in financing activities
$
(11,042)
163
294
(844)
(771)
(3,860)
(1,566)
(2,913)
3,258
(2,886)
(2,350)
(1,015)
Increase (decrease) in cash and cash equivalents
2,617
(10,117)
12
Cash dividends paid
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
896
8,043
11,301
$
10,929
8,043
$
13,279
10,929
Hewlett Packard 2012 10K, sec.gov
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
10
NAVIGATING ACCOUNTING®
HEWLETT PACKARD COMPANY AND SUBSIDIARIES
Valuation and Qualifying Accounts
For the fiscal years ended
October 31
2012
2011
2010
In millions
Allowance for doubtful accounts accounts receivable:
Balance, beginning of period
$470
Increase in allowance from acquisitions
$525
$629
27
7
Addition of bad debt provision
100
23
80
Deductions, net of recoveries
(106)
(105)
(191)
Balance, end of period
$464
$470
$525
130
140
108
42
58
76
(23)
(68)
(44)
Allowance for doubtful accounts financing receivables:
Balance, beginning of period
Additions to allowance
Deductions, net of recoveries
Balance, end of period
$149
$130
$140
Hewlett Packard 2012 10K, sec.gov
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson