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Comprehensive Case Comprehensive Case, Exams of Finance

Walden UniversityFinance

Comprehensive Case Comprehensive Case

Typology: Exams

2024/2025

Available from 03/11/2026

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Financial
&
Managerial
Accounting
for
MBAs,
8e
Easton,
Halsey,
McAnally
(Solution
Manual,
100%
Verified)
Solutions
Manual
Financial
Accounting
for
MBAs
8th
Edition
Easton
Solutions
Manual
Solutions
Manual
Directly
From
The
publisher,
100%
Verified
Answers.
pf3
pf4
pf5
pf8
pf9
pfa

Partial preview of the text

Download Comprehensive Case Comprehensive Case and more Exams Finance in PDF only on Docsity!

Financial & Managerial Accounting for

MBAs, 8e Easton, Halsey, McAnally

(Solution Manual, 100% Verified)

Solutions Manual Financial Accounting for MBAs 8th

Edition Easton Solutions Manual

Solutions Manual Directly From The publisher, 100% Verified Answers.

s ," N

Road Map Learning Objective | Topics eLecture Explain and illustrate a review of financial statements C-3 eC—

and their components.

Income Statement :: Balance Sheet :: Statement of Cash Flows :: Audit Opinion Assess company profitability and creditworthiness. C-23 eC- ROE Disaggregation :: RNOA Disaggregation :: Credit Analysis Forecast financial statements. C-27 eC- Income Statement :: Balance Sheet :: Statement of Cash Flows

Describe and illustrate the valuation of firm equity. C-30 eC—

Discounted Cash Flow Valuation :: Residual Operating Income Valuation :; Assessment C-

ct

J@ LO1 This section reviews and analyzes the financial statements of Harley-Davidson. Explain

iustrate Business Environment for Financial Reporting areview of

financial statements Harley-Davidson 1is a Fortune 500 company and has been the historical market share leader in the and their
components. U.S. 601+cc motorcycle market. The company’s products are sold through a network of independent dealers, of
which the majority sell Harley-Davidson motorcycles exclusively. These dealerships stock and sell the company’s
motorcycles, parts and accessories, general merchandise and licensed products, and perform service on Harley-Davidson
motorcycles. In 2018, Harley reported 1,535 dealerships, 691 (45%) of which are located in the U.S.
Harley reports two business segments: the manufacturing company and the financial services
subsidiary. Harley-Davidson Financial Services 1s engaged in the business of financing and servicing
wholesale inventory receivables and retail consumer loans, primarily for the purchase of
HarleyDavidson motorcycles. Its wholesale activities include financing for its dealers for the purchase
of motorcycles for display, and its financing activities provide loan and lease financing to customers.
This financial services subsidiary operates like a bank, borrowing money at a given rate to fund the
lease receivables and setting a higher rate on its loans and leases. As is common for all lenders,
managing the spread between lease income and interest expense and minimizing credit losses are core
activities for Harley-Davidson Financial Services.
In the MD&A section of its 10-K, Harley-Davidson describes its competitive environment as
follows.

Competition in the segments of the motorcycle market in which the Company currently competes is based upon a number of factors including product capabilities and features, styling, price, quality, reliability, warranty, availability of financing, and quality of the dealer network that sells the product. The Company believes its motorcycles continue to generally command a premium price at retail relative to competitors’ motorcycles. The Company emphasizes remarkable styling, customization, innovation, sound, quality and reliability in its products and generally offers a two-year warranty for its motorcycles. The Company considers the availability of a line of motorcycle parts & accessories and general merchandise, the availability of financing through HDFS and its global network of independent dealers to be competitive advantages. e e e e i e g —

Although dominant in the U.S. market (accounting for approximately 50% of new motorcycle
registrations), Harley-Davidson faces stiff competition outside of the U.S. where it has only a 10%
market share. With this as background, we begin the accounting analysis of Harley-Davidson by
discussing its financial statements.

Income Statement Reporting and Analysis

Harley-Davidson’s income statement is reproduced in Exhibit C.1.

Net Sales

Exhibit C.1 reveals that total revenue (product sales and financial services revenue) increased by 1.2%
in 2018 to $5,716.9 million. However, revenues in 2018 are 4.7% lower than in 2016. In its MD&A
report, management describes its results as follows.

Retail sales of new Harley-Davidson motorcycles in the U.S. were down 10.2% in 2018. Overall, U.S. retail sales of new Harley-Davidson motorcycles were adversely impacted by the continued weak U.S. industry, which was down 8.7% compared to 2017. The Company believes that sales of new motorcycles continued to be adversely impacted by soft used motorcycle prices and a shift in rider preferences toward smaller displacement motorcycles. The Company’s U.S. market share of new 601+cc motorcycles for 2018 was 49.7%, down 1. percentage points compared to 2017 (Source: Motorcycle Industry Council). The Company’s U.S.

continued from previous page market share reflects the adverse impact of a highly competitive marketplace and relatively strong growth in segments in which the Company does not currently compete. In the segments in which the Company does compete (Touring and Cruiser), which represent approximately 70% of the 601+cc market, the Company’s market share was up 0.8 percentage points on a full-year basis. International retail sales of new Harley-Davidson motorcycles were up 0.4% in 2018. Retail sales in emerging markets were up 9.8% partially offset by lower retail sales in developed markets, which declined 2.7% during 2018. e—= o Te T e e e gT - (^) e s i e Tl i mi— = HARLEY-DAVIDSON INC.

Consolidated Statements of Income
Year Ended December 31

$ thousands 2018 Revenue Motorcycles and Related Products. ... .............. $4,968,646 $4,915,027 $5,271,376 Financial SEeIVICES.... oo 748,229 732,197 725, Totalrevenue.... ... .. e 5,716,875 5,647,224 5,996, Costs and expenses Motorcycles and Related Products cost of goods sold... 3,351,796 3,272,330 3,425,997 Financial Services interestexpense.. ............... 193,187 180,193 173, Financial Services provision for credit losses.. ........ 106,870 132,444 136,617 Selling, administrative and engineering expense.. .. ... 1,258,0981,180,1761,213,794 Restructuring EXPENSE £ tim b G oE s S B E ST 8 HE A 93,401 — — Total costs and expenses.. ..................... 5,003,3524,765,1434,950, Operatingincome... ........... .. 713,523 882,081 1,046,294 Other income (expense),net ............... ... .. .... 3,039 9,182 2, Investmentincome.. .......... e 951 3,580 4,645 Interest expense. ........ ......................... 30,884 31,004 29, Income before provision forincometaxes. ............. 686,629 863,839 1,023,911 Provision for incometaxes. .........c. i 155,178 342,080 331,747 Netincome .. ............. ....................... $ 531,4519% 521,759 $ 692,

As required under GAAP, Harley-Davidson recognizes revenue whem the ownershipof its
motorcycles is transferred to its customers. The following footnote provides additional detail on the
company’s revenue recognition for motorcycles as well as for its financial services revenue.

Motorcycles, Parts & Accessories, and General Merchandise—Sales of motorcycles, parts & accessories, and general merchandise are recorded when control is transferred to wholesale customers (independent dealers). This generally takes place upon shipment of the products... The Company offers sales incentive programs to dealers and retail customers designed to promote the sale of motorcycles, parts & accessories, and general merchandise. The Company estimates its variable consideration related to motorcycles and related products sold under its sales incentive programs using the expected value method... The Company offers to its dealers the right to return eligible parts & accessories and general merchandise. When the Company offers a right to return, it estimates returns based on an analysis of historical trends and records revenue on the initial sale only in the amount that it expects to be entitled... Variable consideration related to sales incentives and rights to return is adjusted at the earliest of when the amount of consideration the Company expects to receive changes or the consideration becomes fixed. Financial Services—Interest income on finance receivables is recorded as earned and is based on the average outstanding daily balance for wholesale and retail receivables. Accrued and uncollected interest is classified with finance receivables. Certain loan origination costs related to finance receivables, including payments made to dealers for certain retail loans, are deferred and recorded within finance receivables and amortized over the estimated life of the contract. R o = Wo P U S—z e R i — —e T M S R S (^) ile - i,

Financial _ Managerial Accounting for MBAs, 8e Easton, Halsey, McAnally (Solution Manual,

100 Verified) compressed 2

As 1s customary, product-related revenues are recognized when Harley has performed its obligations to
its customers, that is, when the motorcycles are shipped to its dealers. The amount recognized as
revenue 1s equal to the sales price of the motorcycles less any sales allowances, such as sales discounts
and other incentives. For financial services income, interest i1s accrued when earned over time and is
recognized net of any origination costs paid to dealers to generate the finance receivables.

Cost of Products Sold and Gross Profit

Harley’s 2018 gross profit margin i1s calculated using only the Motorcycles and Related Products
revenue and cost of goods sold. For 2018, gross profit margin is 32.5% ([$4,968,646 —
$3,351,796]/%4,968,646), one percentage point lower than the 33.4% gross profit margin reported for
2017. The company describes the factors that affected the change in gross margins as follows.

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from 2017 to 2018: The decrease in volume was due to lower wholesale motorcycle shipments, as well as lower P&A and general merchandise sales. P&A and general merchandise sales were down due in large part to lower motorcycle shipments and lower retail motorcycle sales. » On average, wholesale prices for motorcycles shipped in 2018 were higher than in the prior year resulting in a favorable impact on revenue. The positive impact on revenue was partially offset by increased costs related to the additional content added to motorcycles shipped in 2018 as compared to the prior year. » The favorable revenue impact from foreign currency was partially offset by higher net foreign currency losses due primarily to the remeasurement of foreign-denominated balance sheet accounts, as compared to the prior year. » Shipment mix changes resulted in a positive impact on gross profit resulting from favorable changes in the mix of motorcycle families, as well as the mix of models within motorcycle families. « Raw material prices were higher primarily due to increased steel and aluminum costs which includes the impacts of U.S. tariffs on steel and aluminum imports.

  • Manufacturing and other costs were negatively impacted by lower fixed cost absorption due to lower production, higher depreciation, the impact of incremental tariffs and temporary inefficiencies associated with the Manufacturing Optimization Plan. In 2018, the impact of
incremental tariffs was $23.7 million.

M LT T T T T S (^) e eS e — r— — : :

The choice of inventory costing method affects cost of goods sold. Harley uses the LIFO method
to cost its inventory. In 2018, the company’s LIFO reserve increased slightly by $6.3 million, possibly
reflecting the increase in raw materials prices, cited above. The increase in the LIFO reserve meant that
cost of goods sold was $6.3 million higher than it would have been under the FIFO inventory costing
method; the LIFO method decreased gross profit by the same amount (see inventory discussion later in
this appendix).

Selling, Administrative, and Engineering Expenses

In 2018, Harley-Davidson reports selling, administrative, and engineering expenses of $1,258 million
(excluding restructuring expenses of $93.4 million), which is 22% of total revenue, higher than in both
2017 (20.9%) and 2016 (20.2%). Included in that account are research and development expenses of
$191.6 million, higher than the $175.2 million in the prior year. SG&A also includes wages for retail
and corporate employees, occupancy costs, and other administrative costs not reported separately.

Pension Expenses

Harley-Davidson’s SG&A expenses include $32.8 million of pension expense (for its regular pension
plan as well as for its supplemental employee retirement plan agreements [SERPA]) and $3.7 million
of other postretirement benefit expense. This is reported in the following table in the pension footnote.

$ thousands, except per share amounts 2018 2017 2016 Numerator Income used in computing basic and diluted earnings per share. ... $531,451 $521,759 $692, Denominator Denominator for basic earnings per share-weighted- average commonshares ................c i, 165,672 171,995 179, Effect of dilutive securities—employee stock compensation plan. .. 832 937 859 Denominator for diluted earnings per share—adjusted weighted-average shares outstanding. ..................... 166,504 172,932 180, Earnings per common share:

BaSiC.. .t $3.21 $3.03 $3.

Diluted.. ... $3.19 $3.02 $3. o= (^) = e i (^) ei - z " T D = = = e i i,

The difference between basic and diluted earnings per share usually arises from the dilutive effects of
employee stock options. As Harley discusses in the footnote presented below, however, if stock options
are “under water” (stock price is lower than the exercise price of the options), they are considered anti-
dilutive, meaning that including them would increase EPS. Accordingly, they are excluded in the diluted
EPS computation, but remain potentially dilutive if Harley’s stock price subsequently rises above the
exercise price of the options. Harley describes the EPS effects of anti-dilutive stock options in 2018 as
follows.

Options to purchase 1.1 million, 0.8 million and 1.4 million weighted-average shares of common stock outstanding during 2018, 2017 and 2016, respectively, were not included in the Company’s computation of dilutive securities because the exercise price was greater than the market price and therefore the effect would have been anti-dilutive. s g e ey S (^) i. - (^) == i T i s i = — — - =-. Y L o o o o

Although not present for Harley-Davidson, convertible debt and preferred shares are also potentially
dilutive for many companies.

Income Taxes

Harley-Davidson’s effective tax rate in 2018 1s 22.6%, significantly lower than in both prior years, as
disclosed in the following footnote.

Provision at statutoryrate.... ......................... 21.0% 35.0% 35.0% State taxes, net of federal benefit... .. .................. 2.6 1.9 1. Foreign rate differential... .. .......................... 0.4 (0.8) (0.6) Domestic manufacturing deduction .. ................... — (2.2) (2.1) Foreign derived intangible income.. .. .................. (1.2) — — Research and developmentcredit. .. ................... (1.1) (0.7) (0.4) Unrecognized tax benefits including interest and penalties... (0.6) 2. (1.3) Valuation allowance adjustments.. .. ................... 0.1 (0.1) 0. Deferred tax balance remeasurement for rate change..... .. (1.2) 5.5 — TETOTIAITANE = 5 = = 5 e 5552 712 i = e 7 2 o e 1 5 5 v e 8 o e 1 1.4 (0.1) — Global intangible low-taxedincome.. .. ................. 04 — — Adjustments for previously accrued taxes ................ (1.0) (1.2) 0. Rate differential on intercompany transfers... ... ......... 0.9 — — Executive compensation limitation.. .. .................. 0.5 — — 8 1 T o e T 04 — (0.3) Provision forincometaxes ... ......................... 22.6% 39.6% 32.4%

While a number of transitory items affected Harley’s effective tax rate, the most significant effect was

the reduction of the corporate statutory tax rate from 35% to 21% as a result of the U.S. Tax Cuts and

Jobs Act of 2017 (TCJA).

Common-Size Income Statement

It is useful for analysis purposes to prepare common-size statements. Exhibit C.2 shows
HarleyDavidson’s common-size income statement covering the two most recent years.
Motorcycles and Related Products cost of goods sold decreased from 66.6% of Motorcycles and

Related Products sales in 2017 to 64.5% in 2018, increasing the gross profit margin on product sales by

210 basis points. As the company describes above, the increase in gross margin is due to increases in
product prices and a favorable change in the mix of products sold toward higher gross profit items. This
was offset, in part, by increases in raw materials prices and unit costs as fixed production costs were
spread over a lower unit production base as well as increased tariffs. Harley also increased its selling,
administrative, and engineering expense from 20.9% of total revenue in 2017 to 22.0% in 2018. The
company attributes this increase to higher recall costs, increased spending on growth initiatives, and
restructuring expense. Finally, net income as a percentage of total revenue increased by 0.1 percentage
points from 9.2% in 2017 to 9.3% in 2018, primarily from lower income taxes due to the tax legislation

Revenue Motorcycles and Related Products.. .. .................. 86.9% 87.0% FinanClal SEetVICES: s« o & i i 5 55 i 88 0 6 o 68 & G0 & 5 & & st @ 5 7 13.1% 13.0% Totalrevenue. ................. i, 100.0% 100.0% Costs and expenses Motorcycles and Related Products cost of goods sold*.. .. .. 64.5% :: 58.6% 66.6% :: 57.9% Financial Services interestexpense.. ................... 3.4% 3.2% Financial Services provision for credit losses.. ............ 1.9% 2.3% Selling, administrative and engineering expense .. ......... 22.0% 20.9% Restructuringexpense .............. ... 1.6% 0.0% Totalcostsandexpenses. .......... ..., 87.5% 84.4% Operating inCome.. .. ...ttt ittt 12.5% 15.6% Other income (expense), net ................ .. ..., 0.1% 0.2% Investmentincome. ....... ... ... ... ... 0.0% 0.1% Interestexpense.. ... ... i e 0.5% 0.5% Income before provision forincometaxes.................. 12.0% 15.3% Provision forincometaxes. .............ciiiiiinnn... 2.7% 6.1% Nt INCOMIES i o s i w28 8 6 s B 5 D E S S EE R B i R e, 9.3% 9.2%

  • Two percentage metrics: Motorcycles and Related Products COGS/Motorcycles and Related Products revenue :: Motorcycles and Related Products COGS/Total revenue Management Discussion and Analysis
The Management Discussion and Analysis section of a 10-K is informative for interpreting company
financial statements and for additional insights into company operations. To illustrate, Harley-Davidson
provides the following analysis of its operating results in the MD&A section of its 2018 10-K.

The Company’s net income for 2018 was $531.5 million, or $3.19 per diluted share, compared to $521.8 million, or $3.02 per diluted share, in 2017. Operating income from the Motorcycles segment