P7-45. ANALYST ADJUSTMENTS 7.1 Reformulating Financial Statements for Warranty Expense Ford Motor Company reported the following...

  

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P7-45. ANALYST ADJUSTMENTS 7.1 Reformulating Financial Statements for Warranty Expense Ford Motor Company reported the following information in its 2018 financial statements. Use these data to answer the requirements. Warranty Liability, 12 Months Ended ($ millions) Beginning balance .... Payments made during the period. Changes in accrual related to warranties issued during the period Changes in accrual related to pre-existing warranties Foreign currency translation and other. Ending balance... Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 $4,558 $4,960 $5,296 (3,286) (3,457) (4,360) 2,326 1,360 2 $4,960 The income statement reports the following additional information. 12 Months Ended ($ millions) Automotive revenues Financial services revenues. Total revenues Dec. 31, 2016 $141,547 10,253 $151,800 2,260 1,415 118 $5,296 Dec. 31, 2017 $145,653 11,113 $156,766 2,584 1,758 (141) $5,137 Dec. 31, 2018 $148,294 12,018 $160,312 a. What is the motivation for analysts to consider reformulating financial statements for warranty expenses? b. Which type of revenue (Automotive or Financial Services) is related to warranty expense? Explain. c. Reformulate the income statement for all three years under the assumption that warranty expense is a constant percentage of revenue across all three years. Specifically, compute adjustments to: warranty expense, income tax expense, and net income. Assume the company's tax rate is 22%. d. Reformulate the balance sheet for all three years. Specifically, compute adjustments to: warranty li- abilities, deferred tax assets, and retained earnings. Assume the company's tax rate is 22%. LO1 FORD MOTOR COMPANY (F) P7-45. ANALYST ADJUSTMENTS 7.1 Reformulating Financial Statements for Warranty Expense Ford Motor Company reported the following information in its 2018 financial statements. Use these data to answer the requirements. Warranty Liability, 12 Months Ended ($ millions) Beginning balance .... Payments made during the period. Changes in accrual related to warranties issued during the period Changes in accrual related to pre-existing warranties Foreign currency translation and other. Ending balance... Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 $4,558 $4,960 $5,296 (3,286) (3,457) (4,360) 2,326 1,360 2 $4,960 The income statement reports the following additional information. 12 Months Ended ($ millions) Automotive revenues Financial services revenues. Total revenues Dec. 31, 2016 $141,547 10,253 $151,800 2,260 1,415 118 $5,296 Dec. 31, 2017 $145,653 11,113 $156,766 2,584 1,758 (141) $5,137 Dec. 31, 2018 $148,294 12,018 $160,312 a. What is the motivation for analysts to consider reformulating financial statements for warranty expenses? b. Which type of revenue (Automotive or Financial Services) is related to warranty expense? Explain. c. Reformulate the income statement for all three years under the assumption that warranty expense is a constant percentage of revenue across all three years. Specifically, compute adjustments to: warranty expense, income tax expense, and net income. Assume the company's tax rate is 22%. d. Reformulate the balance sheet for all three years. Specifically, compute adjustments to: warranty li- abilities, deferred tax assets, and retained earnings. Assume the company's tax rate is 22%. LO1 FORD MOTOR COMPANY (F)

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