Reformulating Financial Statements for Warranty Expense
Ford Motor Company reported the following information in its current fiscal year financial statements. Use these data to answer the requirements.
Warranty Liability $ millions Two Years Prior Prior Year Current Year
Beginning balance $6,837 $7,440 $7,944
Payments made during the period (4,929) (5,186) (6,540)
Changes in accrual related to warranties issued during the period 3,489 3,390 3,876
Changes in accrual related to pre-existing warranties 2,040 2,123 2,637
Foreign currency translation and other 3 177 (212)
Ending balance $7,440 $7,944 $7,705
The income statement reports the following additional information.
$ millions Two Years Prior Prior Year Current Year
Automotive revenues $212,321 $218,480 $222,441
Financial services revenues 15,380 16,670 18,027
Total revenues $227,701 $235,150 $240,468
Required
a. Which type of revenue (Automotive or Financial Services) is related to warranty expense?
Answer 1
Automotive
b. 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%.
Note: Enter an increase in expense as positive and a decrease in expense as negative.
Note: Enter an increase in net income as positive and a decrease in net income as negative.
Note: Round answer to the nearest dollar, if applicable.
Note: Do not round intermediate calculation, if applicable.
$ millions Two Years Prior Prior Year Current Year
Adjustment to warranty expense Answer 2
320.63
Answer 3
0
Answer 4
0
Adjustment to income tax expense (22%) Answer 5
0
Answer 6
0
Answer 7
0
Adjustment to net income Answer 8
0
Answer 9
0
Answer 10
0
c. Reformulate the balance sheet for all three years. Specifically, compute adjustments to: warranty liabilities, deferred tax assets, and retained earnings. Assume the company's tax rate is 22%.
Note: Enter an increase in account balance as positive and a decrease in account balance as negative.
Note: Round answer to the nearest dollar, if applicable.
Note: Do not round intermediate calculation, if applicable.