Question

ESCO Technologies Inc. and Take-Two Interactive Software, Inc., both capitalize software development costs in accordance with their respective policies as summarized here. The condensed financial information that follows was extracted from each company’s fiscal 2007 Form 10-K (all dollars are in thousands). Full financial statements for each company may be accessed at www.sec.gov.

Required
Some analysts believe the amount of capitalized software costs should be subtracted from operating cash flows to improve interfirm comparability and to correct for a firm’s possible attempt to improve operating cash flows by lowering the technological feasibility threshold in the current period relative to prior periods. Consider this possibility when responding to requirements 1 and 2.
1. Make any needed adjustment to Take-Two’s statement of cash flows to improve interfirm comparability of its operating cash flows.
2. Make any needed adjustment to ESCO Technologies’ statement of cash flows to improve interfirm comparability of its operating cash flows.
3. What is the likely impact of any adjustment(s) you made in requirements 1 and 2 on an analysis of operating cash flows?
4. What impact do ESCO’s software capitalization policies have on the company’s net income as reported for fiscal 2007?
5. Compare Take-Two’s and ESCO Technologies’ policies with respect to establishing technological feasibility and comment on the impact of these policies on reported net income.
6. Re-create summary journal entries for the fiscal 2007 activity in Take-Two’s Software development costs and licenses account. Do your entries reconcile with the information reported on Take-Two’s cash flow statement? If not, offer a plausible explanation for any discrepancy.



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  • CreatedSeptember 10, 2014
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