Università Bocconi | Financial Reporting and Analysis (20214)

Question 1 (Inventories)

The following question is related to the 2016 financial statements of Unilever, the world’s
largest consumer goods company. Unilever was formed in 1930 by a Dutch-British merger
and has headquarters in both London and Rotterdam. The company sells a wide range of
foods and beverages as well as cleaning and personal care products. The footnote below
describes Unilever’s inventory policies and balances. Additional information in the
company’s annual report indicates that sales volume (the number of units sold) increased by
0.9% from 2015 to 2016, while the cost of goods sold decreased by 1.7%.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

UNILEVER GROUP

12. INVENTORIES

Inventories are valued at the lower of weighted average cost and net realisable
value. Cost comprises direct costs and, where appropriate, a proportion of
attributable production overheads. Net realisable value is the estimated selling
price less the estimated costs necessary to make the sale.

€  million € million
Inventories 2016 2015
Raw materials and consumables 1,385 1,381
Finished goods and goods for resale 2,893 2,954
4,278 4,335

Inventories with a value of €110 million (2015: €100 million) are carried at net
realisable value, this being lower than cost. During 2016, €113 million (2015: €119
million) was charged to the income statement for damaged, obsolete and lost
inventories. In 2016, €113 million (2015: €123 million) was utilised or released to
the income statement from inventory provisions taken in earlier years.

a. In 2016, Unilever determined that the production cost of some of its inventory items
exceeded these items’ net realizable value. Record the journal entry by which Unilever
responded to this discovery, and explain the rationale behind the policy, with reference to
underlying accounting concepts.
b. Unilever’s cost of goods sold was €27,450 million in 2015. Calculate the amount of
inventory purchases and production costs the company incurred in 2016.
c. Calculate the percentage change in the number of units in finished goods inventory from
2015 to 2016. Assume that Unilever’s product mix has stayed the same over time and that
all finished goods inventories are carried at cost under a periodic record-keeping system.
(Hint: Start by normalizing the ending balance of finished goods inventory in 2015 to 100
units.)
 Università Bocconi | Financial Reporting and Analysis (20214)

Question 2 (Property, Plant and Equipment)

Shown below is an excerpt from the 2017 financial statements of Trex Company, a leading
manufacturer of residential and commercial decking. The company is known for its
composite building materials produced from recycled wood and plastic. The following tables
list the useful lives and carrying values of the company’s property, plant and equipment. On
its 2017 cash flow statement, the company reports a loss on disposal of property, plant and
equipment of $1,738, expenditures for property, plant and equipment of $15,040, and
proceeds from sales of property, plant and equipment of $55. A footnote further indicates that
Trex acquired additional fixed assets with a value of $1,264 as part of its acquisition of
Staging Concepts Acquisition, LLC, a provider of staging, acoustical and seating systems.
(All amounts are in thousands.)

a. State the net carrying value of all depreciable assets as of December 31, 2017.
b. Write the journal entry to record the disposal of property, plant and equipment in 2017.
c. Write the journal entry to record depreciation expense in 2017.
d. Estimate the average remaining useful life of all depreciable assets as of December 31,
2017.
 Università Bocconi | Financial Reporting and Analysis (20214)

TREX COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Property, Plant and Equipment
Property, plant and equipment are stated at historical cost. The costs of additions and
improvements are capitalized, while maintenance and repairs are expensed as incurred.
Depreciation is provided using the straight-line method over the following estimated useful lives:

Buildings 40 years
Machinery and equipment 3-11 years
Furniture and equipment 10 years
Forklifts and tractors 5 years
Computer equipment and software 5 years

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following as of December 31 (in thousands):
2017    2016
Building and improvements $ 49,403    $ 47,859
Machinery and equipment 228,107    223,450
Furniture and fixtures 1,620    2,710
Forklifts and tractors 9,799    10,167
Computer equipment 9,680    10,481
Construction in process 5,954    4,172
Land 11,417    11,417
Total property, plant and equipment 315,980    310,256
Accumulated depreciation (212,870)    (206,970)
Total property, plant and equipment, net $ 103,110    $ 103,286
  
 Università Bocconi | Financial Reporting and Analysis (20214)

Question 3 (Long-term Debt)

The next page shows information taken from the 2017 financial statements of Fortive, a
manufacturer of precision instruments and related products for a wide range of industrial
applications requiring sensing and automation technology. Fortive was spun off from
Danaher Corporation in 2016 and consists of multiple, highly specialized subsidiary business
units both in the United States and abroad. The following tables provide information about
the company’s long-term debt, including carrying values, market values, coupon rates and
maturities. In all calculations, assume annual interest payments at the end of the year.

a. Write the journal entry to record the interest expense in 2017 on the 1.80% senior
unsecured notes due 2019. These notes have a face value of $300 million.
b. Explain whether the market yield on the company’s long-term borrowings has increased
or decreased, on average, between the issuance date and December 31, 2017.
c. Write the journal entry the company would record if it settled all of its long-term debt for
cash on December 31, 2017.
d. Calculate the interest expense in 2018 on the 2.35% senior unsecured notes due 2021 and
write the related journal entry.
 Università Bocconi | Financial Reporting and Analysis (20214)

FORTIVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

NOTE 7. FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments
The carrying amounts and fair values of financial instruments as of December 31 were as follows
($ in millions):
2017 2016
Carrying Fair Carrying Fair
Amount Value Amount Value
Long-term borrowings $ 4,056.2 $ 4,051.8 $ 3,358.0 $ 3,321.4

NOTE 9. FINANCING
The carrying value of the components of our debt as of December 31 were as follows ($ in millions):
2017 2016
U.S. dollar-denominated commercial paper $ 665.1 $ 347.9
Euro-denominated commercial paper 282.7 26.8
U.S. dollar variable interest rate term loan due 2019 500.0 500.0
Yen variable interest rate term loan due 2022 122.4 —
1.80% senior unsecured notes due 2019 298.9 298.3
2.35% senior unsecured notes due 2021 745.9 744.8
3.15% senior unsecured notes due 2026 891.0 890.1
4.30% senior unsecured notes due 2046 546.8 546.8
Other 3.4 3.3
Long-term debt $ 4,056.2 $ 3,358.0

Debt discounts and issuance costs of $18.2 million and $20.1 million as of December 31, 2017 and
December 31, 2016, respectively, have been netted against the aggregate principal amounts of the
components of debt table above.
 Università Bocconi | Financial Reporting and Analysis (20214)

Question 4 (Income Taxes)

The following information is taken from the 2016 annual financial statements of
ArcelorMittal, formed in 2006 by the merger of Arcelor and Mittal Steel to create the world’s
largest steel producer. The company is headquartered in Luxembourg and has subsidiaries
and production facilities worldwide. Shown below is an excerpt from the footnote on income
taxes.

a. As part of its income tax expense in 2016, ArcelorMittal recognized a decrease of $731
million in its net deferred tax assets (deferred tax assets minus deferred tax liabilities).
Provide the journal entry to record the company’s 2016 income tax expense.
b. Calculate the effective tax rate and the average statutory tax rate that ArcelorMittal faced
in 2016. Identify the two largest items that explain why the effective and statutory tax
rates differ, and explain how and why each of these two items contributes to the rate
difference.
c. In 2016, the Luxembourg parliament voted to decrease the corporate income tax rate from
29.22% to 26.01% from 2017 onward. Calculate the ending balance of affected deferred
tax assets in ArcelorMittal’s Luxembourg subsidiaries as of December 31, 2016.
 Università Bocconi | Financial Reporting and Analysis (20214)

ARCELORMITTAL AND SUBSIDIARIES 

Notes to Consolidated Financial Statements  
(millions of U.S. dollars, except share and per share data)

9.1 Income tax expense (benefit)

The following table reconciles the expected tax expense (benefit) at the statutory rates applicable in
the countries where the Company operates to the total income tax expense (benefit) as calculated:
Year  ended  December  31,
2016 2015 2014
Net income (loss) (including non-controlling interests) 1,734 (8,423) (974)
Income tax expense (benefit) 986 902 454
Income (loss) before tax 2,720 (7,521) (520)
Tax expense (benefit) at the statutory rates applicable 677 (2,146) (147)
to profits (losses) in the countries
Permanent items (5,940) (2,124) (273)
Rate changes 593 - 36
Net change in measurement of deferred tax assets 5,344 4,940 306
Tax effects of foreign currency translation 73 153 446
Tax credits (21) (13) (63)
Other taxes 126 18 79
Others 134 74 70
Income tax expense (benefit) 986 902 454

Rate changes
The 2016 tax expense from rate changes of 593 is mainly due to the impact of the decrease in the
future income tax rate on deferred tax assets in Luxembourg resulting in tax expense of 647, partly
offset by a tax benefit of (50) in France.