Accounting Question

1- Lakeshore Tea Company: for this case study it is clear what is required and can you submit two files one describing what you did for me to understand and one to be submitted to the instructor.   2- Judy Gent: For this case can you submit two files one describing what is needed and what you did for me to understand and one to be submitted to the instructor.

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LAKESHORE TEA COMPANY: MERCHANDISING OPERATIONS
Martin Eidenberg wrote this exercise under the supervision of Ian Dunn solely to provide material for class discussion. The authors
do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain
names and other identifying information to protect confidentiality.
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Copyright © 2021, Ivey Business School Foundation
Version: 2023-03-03
Lakeshore Tea Company Inc. (Lakeshore) was launched by Anna Davis in 2019. The company operated as
an herbal tea processor and supplier in Mississauga, Ontario. Davis imported herbs and tea leaves from a
variety of sources across the globe. Over its first two years of operations, Lakeshore experienced significant
growth and began supplying a variety of restaurants, health food stores, and small grocery outlets in the
Greater Toronto Area. Apart from small orders from friends and family, which were usually paid for in
cash, all of Lakeshore’s sales were made on credit. Payment terms for all credit sales were 3/8, net 30.1
Davis totalled cash sales and prepared the company’s financial statements on a monthly basis.2
Lakeshore’s April 30, 2021, statement of financial position included the following selected account
balances:3
Accounts Receivable
Inventory
Accounts Payable
$ 4,469
5,927
3,902
During May 2021, Davis recorded the following notes about Lakeshore’s transactions:4
May 1
Great Lakes Grocery purchased a large quantity of Lakeshore’s product for $2,834, on credit.
May 3
Email received from Great Lakes Grocery with a complaint that multiple packages were
improperly sealed. Agreed to reduce Great Lakes Grocery’s account by $230.
May 4
Ordered supply of tea leaves from Mangrove Trading Co. in Colombo, Sri Lanka. The order
totalled $4,765 with terms of 10 EOM, FOB Mississauga.
May 5
Received $2,256 payment from Credit Valley Health-Mart for goods purchased on credit on
April 24, 2021.
1
All discounts were calculated on the invoice price net of returns and allowances.
Financial statements were prepared using a periodic inventory system.
3
All currency amounts in CA$ unless otherwise specified.
4
All credit terms were calculated from the date of ownership.
2
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May 7
Electronic funds transfer arrived from Great Lakes Grocery as payment for goods sold on
May 1.
May 8
Received electronic confirmation that the shipment from Mangrove Trading Co. had left.
May 10
Paid Nairobi Organic Wholesale Ltd. for an order costing $3,902, which arrived on April 27,
2021, with credit terms of 2/15, n/30. 5
May 11
Streetsville Health Food Co-op made a credit purchase of an assortment of Lakeshore’s teas
for $756. Cost of the goods sold to the co-op was $437.
May 13
Sold $4,229 of merchandise to Upper Canada Fine Foods (UCFF) on credit.
May 14
Ordered a variety of herbs from Escarpment Herbs, Lakeshore’s preferred local supplier.
The herbs were shipped later that day. The cost of the order amounted to $1,016 and
shipping charges were an additional $68. Lakeshore had always made use of the generous
discount terms offered by Escarpment Herbs in past orders.6
May 17
Signed for the arrival of the order from Escarpment Herbs.
May 18
Two bags of herbs from the May 14 order were damaged. Returned the bags and
Escarpment Herbs reduced Lakeshore’s account by $56.
May 19
Informed by purchasing manager at UCFF that $168 worth of product had been purchased
in error. Goods were returned to Lakeshore this afternoon. Given that UCFF was a large and
important customer of Lakeshore, UCFF’s account would be adjusted accordingly.
May 22
Cheque received from Streetsville Health Food Co-op for goods sold on May 11.
May 25
Shipment received from Mangrove Trading Co. (ordered on May 4).
May 26
Electronic funds transfer sent to Escarpment Herbs for full payment of amount owed.
May 29
Received $1,350 from UCFF in partial payment of its outstanding account with the remainder
promised to be paid in June.
May 31
Cash sales for the month amounted to $1,138.
At the close of business on May 31, 2021, Davis performed a physical inventory count. Based on this count,
the total cost of goods remaining on hand was $6,027.
REQUIRED
1. Record, using a super-T, all opening balances, transactions, and adjusting entries relating to
Lakeshore’s merchandising operations for the month ending May 31, 2021.
2. Prepare the revenue and cost of goods sold sections as they would appear on Lakeshore’s statement of
earnings for the month ending May 31, 2021.
5
6
Shipping terms were FOB Destination.
Escarpment Herbs shipped all products FOB shipping point with credit terms of 5/10, n/45.
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Rev. Dec. 10, 2014
JUDY GENT—INVENTORY
Judy Gent was a driven person who had a knack for numerical analysis, deductive
reasoning, and quick insights. She also had a desire for maintaining as many career options as
possible for as long as possible. Thus as a forward-looking young professional, she had both the
CPA and CFA professional certifications in her sights.1 The CPA exam, as well as Level 1 of the
CFA exam, was on her spring schedule, and she had begun her preparation with the resolute
dedication that she was always able to muster when she saw hard work and accomplishment on
the horizon. One of this week’s topics slated for her review was the financial reporting of, and
the accounting choices available for, corporate inventories. For most people, she guessed the
topic would not hold much attraction, but she knew there were some nuances and interesting
aspects of the topic to be explored. It was 9:30 a.m. Saturday. She had already gone for a run,
showered, eaten, walked the dog, and set out the materials for her review. She would tackle her
review in five phases.
Phase One
During the week, Gent had assembled materials from her undergraduate days, various
online exam study sites, and notes given to her by some of her slightly older friends who had
already taken the exams. She had synthesized all of it, and she wanted to succinctly and expertly
answer some fundamental background questions pertaining to the topic of inventories in the first
phase of study she had set up for herself. The initial questions for which she wanted to be sure
she had the comprehensive answers:
1. What is meant by the terms “physical flow” and “cost flow” of inventory materials? Does
the financial reporting principle of matching dictate that they be the same? For a
merchandising company such as Wal-Mart, what kinds of costs would be included in its
cost flow focus? How about for a manufacturing company such as Ford Motor?
1
CPA = Certified Public Accountant; CFA = Chartered Financial Analyst.
This public-sourced case was prepared by Professor Mark E. Haskins, Darden School of Business, and has benefited
from collaborations with various colleagues over the years on earlier versions. It was written as a basis for
discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2014
by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies,
send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
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2. As cost flow options, are LIFO, FIFO, and weighted average each available to U.S.
companies for financial reporting purposes?2 How do they differ and how are they
similar? Are all three available for companies to use on their corporate tax returns? If not,
which one(s)? Does a company have to choose one of the three for all of its different
inventories, or could it choose one method for some inventory items and another method
for other items?
3. What do the terms “periodic inventory system” and “perpetual inventory system” mean,
and do companies have a choice between the two systems?
4. Conceptually, what is meant by the term “LIFO reserve”?
5. What is the best way to explain “LIFO liquidation”?
6. In a head-to-head financial comparison of LIFO to FIFO, and assuming inventory
quantities for a hypothetical U.S. manufacturer of a technology-based but nonspecialized
product that had not declined during the year, are each of the following generally true or
not, and why?
a. Cost of goods sold for the income statement calculated under the LIFO method would
be higher than under FIFO if, during the year, the company had incurred ever-higher
costs of production.
b. FIFO presents ending inventory on the balance sheet as a function of the latest costs
incurred for producing (or buying) inventory items still on hand.
c. FIFO results in a higher ending inventory monetary figure on the balance sheet than
LIFO if, after several years of production costs holding steady, during the current
year costs of production had declined.
d. If, over the foreseeable future, the company’s cost of supplies, raw materials, and
manufacturing labor are projected to increase, the company could reduce its tax bill,
all other things equal, by adopting LIFO.
e. The company’s income statement will best reflect the matching of current costs to
current revenues by the company adopting FIFO.
f. If, over the years, the cycle time for production is short (e.g., days, not months) and
sales are continuous and inventory levels are lean, there would not be much
difference between a FIFO-based and a LIFO-based ending inventory balance sheet
figure and an income statement cost of goods sold figure for the company.
Phase Two
Gent felt pretty confident about the accurate way she had been able to address the
foregoing conceptual questions she had teed up for herself. She was ready to move on. From her
collection of materials, she pulled out a set of actual annual report excerpts pertaining to the
2
LIFO = last in, first out; FIFO = first in, first out.
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inventory of Custom Manufacturing Inc. that her friend Kirk had given her (Exhibit 1). As she
looked at the annual report information, several questions popped into her head. She felt driven
to answer them in as complete and coherent a manner as possible. Specifically, she wondered:
1. What would the balance sheet inventory amounts have been as of September 30, 2013
and 2012, if all inventories had been reported on a FIFO basis?
2. What criteria might Custom Manufacturing have used to decide that LIFO would be
adopted for certain inventory categories while FIFO would be applied to others?
3. What is the meaning and significance of the liquidations mentioned in Custom
Manufacturing’s inventory footnote?
4. If Custom Manufacturing had always used FIFO for all inventories, what difference
would it have made in the 2013 income statement, 2013 balance sheet, and 2013 cash
flow statement? In pondering that intriguing question, Gent realized she had to assume an
income tax rate—she chose to use 30%—and she also assumed all tax effects
immediately affected cash (i.e., taxes payable were not affected).
Phase Three
Gent’s stomach began to growl. The time had flown by, and she noticed that it was nearly
noon. She thought she could squeeze in one last review focus before she set her materials aside
to prepare a well-deserved lunch.
The third phase of her inventory review involved a bit of a puzzle and was prompted by a
thin packet of business articles she had found in her cache of old school materials. The articles
carried such headlines as “Inventory Error Spurs Restatement,” “Inventory Error Eyed at Allied
Defense,”3 “Anaren Completes Final Review of Inventory Valuation Error,” “VeriFone Admits
Accounting Errors, Investors Halve Stock Price,” and the one that really caught her attention,
“Ace Hardware Hammered by $154 Million Inventory Error.” As she had perused the articles a
couple of days earlier in anticipation of her study weekend, she noticed these reported
observations:

The “errors occurred in the valuation of inventory consigned to one of its contract
manufacturers and…as a result, the Company’s inventory and trade payables balances
and the reported amounts of cost of goods sold and other income expense net were not
properly reported.”4
3
See http://www.cfo.com/printable/article.cfm/8916199 (accessed Apr. 19, 2013).
S. Taub, “Inventory Error Spurs Restatement,” http://www.cfo.com/printable/article.cfm/10712460 (accessed
Apr. 19, 2013).
4
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
“The inventory valuation error…resulted in an overstatement of the Company’s inventory
and pretax income…”5

“The error appears to have accumulated over at least five years…[and] was an
overstatement of gross margin that resulted in an overstatement of gross profits that
resulted in an overpayment of…dividends.”6

“Management anticipates adjusting several earnings figures downward [and this] will
include reductions to previously reported inventories…”7
These statements had aroused her curiosity as to the financial effects of some common
inventory mistakes under a FIFO periodic inventory method and through two successive
quarterly financial statements when the material costs and quantities of the company had been
moderately rising. As Gent thought about tracing those financial effects through the financial
statements, she wanted to keep it simple, so she chose to ignore any potential income tax effects
there might typically be. She wanted to simply identify whether certain designated parts of the
financial statements were overstated (O), understated (U), or okay as reported (OK), assuming no
prior period corrections were retroactively made. The blank template she created and wanted to
correctly fill in directed her to several specific parts of an income statement and balance sheet
(Exhibit 2) and would allow her to try to track the following three mistakes:
Mistake #1—Three days before the end of fiscal quarter 1 (Q1), the company received
$50,000 of special supplies that had been shipped to it on a consignment/trial basis. The
supplies were mistakenly included in the ending inventory physical count. One month into
fiscal Q2, all the special supplies were returned to the vendor because they did not suit the
company’s purposes.
Mistake #2—For one large category of raw-materials inventory on hand at the end of fiscal
Q1, the company’s new controller had mistakenly applied the LIFO cost flow method and
not the FIFO. The controller did not make the same mistake in fiscal Q2.
Mistake #3—The plant accounting clerk at the company’s largest overseas facility had
classified more than $100,000 of plant overhead costs incurred in fiscal Q1 as an operating
expense of that quarter. In fiscal Q1, the number of units produced exceeded the number of
units sold. In fiscal Q2 and congruent with the principles of activity-based costing, all plant
overhead costs were properly allocated to that period’s units produced. Fiscal Q2 was an
active sales period. By the end of that quarter, units on hand were at a prefiscal Q1 level.
5
“Anaren Completes Final Review of Inventory Valuation Error,” http://www.investor.anaren.com/
releasedetail.cfm?ReleaseID=378010 (accessed Apr. 19, 2013).
6
S. Taub, “Ace Hardware Hammered by $154 Million Inventory Error,” http://www.cfo.com/printable/
article.cfm/9770446 (accessed Apr. 19, 2013).
7
J. Webster, “VeriFone Admits Accounting Errors, Investors Halve Stock Price,”
http://www.ecommercetimes.com/story/60583.html (accessed Apr. 19, 2013).
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Once Gent completed this part of her review, she would enjoy an extended lunch break
before deciding whether to continue reviewing the inventory topic later that afternoon. She had
to admit, she was on a roll and would most likely continue so she could check that topic off her
list of financial reporting topics to study in preparation for her upcoming professional exams.
Post-Lunch Review
Gent had found her morning’s inventory review quite productive and rewarding. And the
leftover Chinese food she had found in the refrigerator had tasted particularly good. Following
lunch, she had taken a 30-minute power nap. Now she was ready to begin her afternoon study.
Phase Four
Months before planning her financial reporting studies program, Gent had noted in the
business press several articles that conveyed some rather significant financial news. In particular,
she remembered a series about the trying times BlackBerry Ltd. was encountering and some of
the financial reporting implications arising from those difficulties. It seemed the company was
finding it hard to maintain hardware sales levels in the face of some very stiff competition,
especially from Apple and Samsung. In her file, she found one such article that she had saved,
thinking at the time that it might be interesting to track how the company handled some of its
financial reporting in the face of such difficulties (see Panel A, Exhibit 3). In that article, the
company talked about some inventory write-downs that appeared serious and not something
companies had to do very often. In fact, it did not take a rocket scientist to figure out that such
write-downs were bad news and thus to be avoided if at all possible.
Gent spent the next 45 minutes tracking down the latest annual report information from
BlackBerry to see what was disclosed in that regard. Since BlackBerry was a Canadian company
selling shares on a U.S. market, she found the company’s Form 40-F filed with the U.S.
Securities and Exchange Commission (excerpts are in Panels B–E, Exhibit 3). She wanted to
identify all the pertinent inventory disclosures, noting what was communicated and how.
Phase Five
Gent’s inventory review was nearly complete. One final, important focus remained—it
was a topic that also intrigued her. She was quite aware of the fact that companies could choose
from an array of generally accepted accounting principles (GAAP) for preparing their published
financial statements. In accounting for inventories, she easily recalled that there were options
available to companies (e.g., LIFO, FIFO, average), but she also knew that companies could
change from one method to another if they had good reasons and if they fulfilled a requirement
to disclose the change to readers of their financial statements. What were those reasons? How did
companies “sell” the change to the readers of their financial statements? What did they disclose
about the change and how comprehensive and informative was it? Interestingly, Gent had come
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across two New York Stock Exchange companies that in the same year—2009—had changed
inventory methods, although to opposite methods. Pactiv Corporation changed from a
combination of LIFO and FIFO to purely FIFO (Exhibit 4), and Frontier Oil Corporation had
changed from FIFO to LIFO (Exhibit 5). She wanted to review their disclosures and make sure
she understood what had to be disclosed in that regard, without taking the time to render or
assess any calculations.
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Exhibit 1
JUDY GENT—INVENTORY
Corporate Annual Report Inventory-Related Excerpts
Panel A
Custom Manufacturing Inc.
Consolidated Statements of Income (partial)
(in millions) For the years ended September 30
Net sales
Cost of goods sold
Research and development expenses
Selling, general and administrative expenses
Amortization of intangible assets
Goodwill impairment loss
Restructuring charges
Equity in earnings of nonconsolidated affiliates
Other (income) expense—net
Interest income
Interest expense
Income before income taxes
Provision for income taxes
Net income
2013
$56,000
47,000
1,500
2,800
500
250
1,600
(600)
50
(40)
1,200
1,740
540
$ 1,200
2012
$59,000
51,000
1,400
2,700
450
—
200
(1,300)
250
(40)
1,300
3,040
800
$ 2,240
2011
$53,500
45,000
1,700
2,600
600
100
—
(1,150)
(150)
(30)
1,400
3,430
1,000
$ 2,430
Custom Manufacturing Inc.
Consolidated Statements of Cash Flows (partial)
(in millions) For the years ended September 31
Operating activities
Net income
$
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision (Credit) for deferred income tax
Earnings of nonconsolidated affiliates less than (more than) dividends received
Net gain on sales of investments and property
Goodwill impairment
Restructuring charges
Changes in working capital:
Accounts receivable
Inventories
Income taxes payable
Accounts payable
Other current assets and liabilities
Cash provided by operating activities
2013
1,200
2012
$
2,240
2011
$
2,430
2,700
(730)
(600)
(65)
200
1,500
2,900
10
(1,000)
(110)
—
500
3,000
300
(1,150)
(115)
70
—
(200)
(800)
(150)
300
(50)
(150)
(700)
(100)
360
160
(775)
(750)
(125)
500
200
3,305
4,110
4,085
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Exhibit 1 (continued)
Panel B
Custom Manufacturing Inc.
Consolidated Balance Sheets (partial)
(in millions) At September 30
2013
2012
Assets
Current assets:
Cash and cash equivalents
Accounts receivable: (net of allowance – 2013: $120; 2012: $122)
Inventories
Deferred income tax assets—current
Other current assets
Total current assets
Liabilities and Equity
Current liabilities:
Notes payable
Long-term debt due within one year
Accounts payable:
Income taxes payable
Deferred income tax liabilities—current
Accrued and other current liabilities
Total current liabilities
Long-term debt
Other noncurrent liabilities:
Deferred income tax liabilities—noncurrent
Pension and other postretirement benefits—noncurrent
Other noncurrent obligations
Total other noncurrent liabilities
Stockholders’ equity:
Common stock (authorized 1,300,000,000 shares of $2.00 par value each;
issued 2013: 3,500,000 shares; 2012: 3,425,000 shares)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
The Custom Manufacturing Inc.’s stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
$
4,000
9,600
8,500
900
350
$ 23,350
$
$
$
400
700
7,300
250
100
2,600
11,350
20,000
5,500
9,400
7,700
500
300
$ 23,400
$
500
2,700
7,000
400
130
2,500
13,230
18,000
800
12,000
3,400
16,200
1,100
10,000
3,100
14,200
7,000
3,300
19,500
(7,500)
22,300
1,000
23,300
70,850
6,850
2,700
19,000
(6,000)
22,550
1,100
23,650
69,080
$
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Exhibit 1 (continued)
Panel C
NOTE—Inventories
Inventories are stated at the lower of cost or market. Depending on the business unit, cost
is determined by either the last-in-first-out (LIFO) or the first-in-first-out (FIFO) method.
The following table provides details about inventories:
Inventories (in millions) at September 30
Finished goods
Work in process
Raw materials
Supplies
Total
2013
$
$
4,900
2,000
900
700
8,500
2012
$
$
4,400
1,700
850
750
7,700
The reserves reducing inventories from a FIFO basis to a LIFO basis amounted to $800
million at September 30, 2013 and $650 million at September 30, 2012. Inventories
valued on a LIFO basis represented 30 percent of the total inventories at September 30,
2013 and 32 percent of total inventories at September 30, 2012.
A decrease in the level of certain domestic inventories resulted in the liquidation of some
of the company’s LIFO inventory layers, increasing pretax income $88 million in 2013,
$130 million in 2012 and $160 million in 2011.
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Exhibit 2
JUDY GENT—INVENTORY
Template for Recording the Direction and Location of Certain Inventory Accounting Mistakes
Total
Expense
Net
Income
Total
Assets
Total
Liabilities
Total
Current
Assets
Total
Current
Liabilities
Net
Working
Capital
Retained
Earnings
Fiscal
Quarter 1:
Mistake #1
Mistake #2
Mistake #3
Fiscal
Quarter 2:
Mistake #1
Mistake #2
Mistake #3
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Exhibit 3
JUDY GENT—INVENTORY
BlackBerry Ltd. Inventory Write-down
Panel A: “BlackBerry to Fire 4,500, Write Down Up to $960 Million” (excerpts)
BlackBerry Ltd. is eliminating a third of its staff and scaling back operations after quarterly sales missed analysts’
estimates by half, a sign of quickening deterioration at the already struggling smartphone maker. The company will
cut 4,500 jobs and record an inventory writedown of as much as $960 million for the fiscal second quarter,
according to a statement today. Waterloo, Ontario-based BlackBerry expects to report a net operating loss of as
much as $995 million for the period…it has failed to gain traction against Apple Inc.’s iPhones or Google Inc.’s
Android devices…The inventory writedown is mostly for Z10 touch-screen devices, which the company had
designated as its flagship model to compete with the iPhone…The writedown extends a streak of inventory charges,
which were previously spurred in part by the ill-fated PlayBook tablet.
Source: Hugo Miller, “BlackBerry to Fire 4,500, Write Down Up to $960 Million,” September 20, 2013,
http://www.bloomberg.com/news/2013-09-20/blackberry-to-fire-4-500-write-down-up-to-960-million.html
(accessed Nov. 21, 2013).
Panel B: Excerpts from BlackBerry Ltd.’s Form 40-F, Fiscal Year Ended March 1, 2014,
Management Discussion and Analysis section
Overview
A global leader in mobile communications, the Company revolutionized the mobile industry with the introduction of
the BlackBerry solution in 1999. Today, the Company aims to inspire the success of its millions of customers
around the world by continuously pushing the boundaries of mobile experiences. Founded in 1984 and based in
Waterloo, Ontario, the Company operates offices in North America, Europe, Middle East and Africa, Asia
Pacificand Latin America. The Company’s common shares are listed on the NASDAQ Global Select Market
(NASDAQ: BBRY) and the Toronto Stock Exchange (TSX: BB).
With the BlackBerry platform, the Company believes it offers a market-leading mobile communications experience
with push-based connectivity, industry-leading security and enterprise manageability, excellent radio performance
and differentiated social applications, such as BBM, that provide immediacy, productivity and collaboration.
Historically, the wireless communications market has been highly segmented. Where previously the market was
segmented into distinct enterprise and consumer/extreme productivity segments, the market has increasingly evolved
in recent years and there is now significant overlap between the segments. The enterprise market is now characterized
by a combination of enterprise-deployed devices and devices that are purchased by consumers but also used in the
corporate environment, commonly referred to as “Bring Your Own Device” or BYOD. These consumer devices are
supported in a corporate environment by information technology (“IT”) departments for access to corporate
messaging and data applications. As the market has evolved, IT departments now look for enterprise mobility
solutions that can handle a range of requirements. The Company has introduced products to address this market shift
including BlackBerry 10 smartphones with BlackBerry Balance, BES 10 and the recently announced BES 12
platform, which will unify the support for BBOS and BlackBerry 10 devices, together with that for iOS, Android and
Windows Phone, as well as Secure Work Space, which give IT departments the ability to securely monitor and
control multiple OS platforms, and securely protect corporate data on an employee’s personal smartphone or tablet.
The Company believes that it remains the mobile device management leader and continues to see confidence from its
customers through the increasing penetration in BES 10, where the Company now has approximately 33,000
commercial and test servers installed to date, up from 30,000 in December 2013. The Company’s latest devices are its
BlackBerry 10 smartphone models, including the Z30, Z10, Q10 and Q5, each with Long Term Evolution capability
on next generation, “4G” networks. These 4G networks offer a number of improvements over the previous
generations, with improved download and upload speeds being the most widely promoted.
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Exhibit 3 (continued)
Wireless carriers in the United States have been aggressively deploying and marketing 4G networks. Deployment of
4G networks remains relatively limited globally, but wireless operators in many international markets are expected
to move aggressively to these new networks in the coming years.
The Company has experienced a significant decline in revenue and market share due to intense competition and
other factors…Some of the Company’s main device and enterprise competitors include Apple Inc., Google Inc.,
Samsung Electronics Co., Ltd., LG Electronics Mobile Communications Company, Lenovo Group Ltd., HTC
Corporation, Huawei Technologies Co., Ltd., Microsoft Corporation, Nokia Corporation, ZTE Corporation, IBM
Corporation, SAP AG, Citrix Systems, Inc., VMware, Inc., Mobile Iron, Inc., and Good Technology Corporation.
Competitors of the Company’s QNX business include Microsoft Corporation, Green Hills Software, Intel
Corporation, MontaVista Software, Mentor Graphics Corporation, and Sysgo AG. Products that compete with the
Company’s BBM service include WhatsApp, Facebook Messenger, Skype, Line, iMessage, WeChat, Viber, Kik,
Kakao Talk, Telegram and Snapchat.
Inventory Charges
During fiscal 2014, the Company shipped devices to its carrier and distributor partners to support new and
continuing product launches and meet expected levels of end customer demand. However, the sell-through levels for
BlackBerry 10 smartphones decreased significantly during fiscal 2014 due to the maturing smartphone market, very
intense competition and, the Company believes, the uncertainty created by the Company’s recently completed
strategic review process. These factors caused the number of BlackBerry 10 devices in the channel to increase above
the Company’s expectations, which in turn caused the Company to reassess and revise its future demand
assumptions for finished products, semi-finished goods and raw materials. The Company also made the decision to
cancel plans to launch two devices to mitigate the identified inventory risk. Based on these revised demand
assumptions, the Company recorded primarily non-cash, pre-tax charges against inventory and supply commitments
of approximately $934 million ($666 million after tax, or $1.27 per share diluted), which was primarily attributable
to BlackBerry Z10 devices (the “Z10 Inventory Charge”) in the second quarter of fiscal 2014, and approximately
$1.6 billion ($1.3 billion after tax, or $2.56 per share diluted), which was primarily attributable to BlackBerry 10
devices (the “Q3 Fiscal 2014 Inventory Charge”) in the third quarter of fiscal 2014. The Z10 Inventory Charge and
the Q3 Fiscal 2014 Inventory Charge were subsequently adjusted in the fourth quarter of fiscal 2014 to reflect
increased sell through rates, relative to the estimates and assumptions previously considered, resulting from
discounted pricing and revised orders on hand for devices and components of BlackBerry 10 products, resulting in a
reduction of the original charges incurred of approximately $149 million ($106 million after tax, or $0.20 per share
diluted), which was recorded as a reduction of cost of goods sold in the fourth quarter of fiscal 2014 (the “Q4 Fiscal
2014 Inventory Recovery”).
Critical Accounting Estimates
The Company’s policy for the valuation of inventory, including the determination of obsolete or excess inventory,
requires management to estimate the future demand for the Company’s products. Inventory purchases and purchase
commitments are based upon such forecasts of future demand and scheduled rollout and life cycles of new products.
The business environment in which the Company operates is subject to rapid changes in technology and customer
demand. The Company performs an assessment of inventory during each reporting period, which includes a review
of, among other factors, demand requirements, component part purchase commitments of the Company and certain
key suppliers, product life cycle and development plans, component cost trends, product pricing and quality issues.
If customer demand subsequently differs from the Company’s forecasts, requirements for inventory write-offs that
differ from the Company’s estimates could become necessary. If management believes that demand no longer
allows the Company to sell inventories above cost or at all, such inventory is written down to net realizable value or
excess inventory is written off.
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Exhibit 3 (continued)
Significant judgment was required in calculating the inventory charges, which involved forecasting future demand
and the associated pricing at which the Company can realize the carrying value of its inventory. Further, the
Company’s expectations with respect to its inventory and asset risk (including its ability to sell its inventory of
BlackBerry 10 products and manage its purchase obligations with its manufacturing partners) and the potential for
additional charges related to inventory are forward-looking statements that are subject to the inherent risk of
forecasting the Company’s financial results and performance for future periods, particularly over longer periods,
given the rapid technological changes, evolving industry standards, intense competition and short product life cycles
that characterize the wireless communications industry. As noted above, these difficulties in forecasting the
Company’s financial results and performance are magnified at the present time given the uncertainties related to the
Company’s operational restructuring, recent management changes and the strategic initiatives described in this
MD&A…Intense competition, rapid change and significant strategic alliances within the Company’s industry,
including potential future strategic transactions by its competitors or carrier partners, could continue to weaken the
Company’s competitive position or may continue to require the Company to reduce its prices to compete
effectively” and “The Company faces substantial inventory and other asset risk, including risks related to its ability
to sell its inventory of BlackBerry 10 products, manage its purchase obligations with its manufacturing partners and
the potential for additional charges related to its inventory, as well as risks related to its ability to mitigate inventory
risk through its new partnership with Foxconn.” In fiscal 2014, the Company recorded the Z10 Inventory Charge,
the Q3 Fiscal 2014 Inventory Charge and the Q4 Fiscal 2014 Inventory Recovery.
Panel C: Excerpts from Independent Auditors’ Report
(from BlackBerry Ltd.’s Form 40-F, Fiscal Year Ended March 1, 2014)
To the Board of Directors and Shareholders of BlackBerry Limited (formerly known as Research In Motion
Ltd.)
We have audited the accompanying consolidated financial statements of BlackBerry Limited [the “Company”],
which are comprised of the consolidated balance sheets as at March 1, 2014 and March 2, 2013, the consolidated
statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the years ended
March 1, 2014, March 2, 2013, and March 3, 2012, and a summary of significant accounting policies and other
explanatory information.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company as at March 1, 2014 and March 2, 2013, and the results of its operations and its cash flows for each of
the years ended March 1, 2014, March 2, 2013, and March 3, 2012, in accordance with United States generally
accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of March 1, 2014, based on the criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (1992 Framework) and our report dated March 28, 2014 expressed an unqualified opinion on
the Company’s internal control over financial reporting.
Kitchener, Canada,
March 28, 2014.
/s/ Ernst & Young LLP
Chartered Accountants
Licensed Public Accountants
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Exhibit 3 (continued)
Panel D: Excerpts from Financial Statements
(from BlackBerry Ltd.’s Form 40-F, Fiscal Year Ended March 1, 2014)
BlackBerry Limited
Incorporated under the Laws of Ontario
(United States dollars, in millions)
Consolidated Balance Sheets [partial]
As at
Assets:
Current
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Other receivables
Inventories
Income taxes receivable
Other current assets
Deferred income tax asset
Assets held for sale
March 1, 2014
March 2, 2013
$
$
Long-term investments
Property, plant and equipment, net
Intangible assets, net
$
Liabilities:
Current liabilities
Long-term debt
Deferred income tax liability
Shareholders’ equity:
Capital stock and additional paid-in capital
Common shares: authorized unlimited number of non-voting, redeemable,
retractable Class A common shares and unlimited number of voting
common shares—Issued 526,551,953 voting common shares (March 2,
2013—524,159,844)
Treasury stock—March 1, 2014—7,659,685 (March 2, 2013—9,019,617)
Retained earnings
Accumulated other comprehensive loss
$
1,579
950
972
152
244
373
505
73
209
5,057
129
942
1,424
7,552
$
1,549
1,105
2,353
272
603
597
469
139
354
7,441
221
2,073
3,430
13,165
2,268
1,627
32
3,460
—
245
3,927
3,705
2,418
(179)
1,394
(8)
2,431
(234)
7,267
(4)
3,625
9,460
7,552
$
13,165
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Exhibit 3 (continued)
BlackBerry Limited
(United States dollars, in millions, except per share data)
Consolidated Statements of Operations [partial]
For the Year Ended
March 1,
2014
Revenue
Hardware and other
Service and software
Cost of sales
Hardware and other
Service and software
Gross margin
Operating expenses
Research and development
Selling, marketing and administration
Amortization
Impairment of long-lived assets
Impairment of goodwill
Debentures fair value adjustment
Operating income (loss)
$
March 2,
2013
March 3,
2012
3,880 $
2,933
6,902
4,171
$
14,031
4,392
6,813
11,073
18,423
6,383
473
7,060
579
11,217
631
6,856
7,639
11,848
(43)
3,434
6,575
1,286
2,103
606
2,748
—
377
1,509
2,111
714
—
335
—
1,556
2,600
567
—
355
—
7,120
4,669
5,078
(7,163)
(1,235)
1,497
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Exhibit 3 (continued)
Panel E: Inventory-Only Excerpts from Notes to the Consolidated Financial Statements
(from BlackBerry Ltd.’s Form 40-F, Fiscal Year Ended March 1, 2014, in millions of U.S. dollars)
Raw materials, work in process and finished goods are stated at the lower of cost or market value. Cost includes the
cost of materials plus direct labour applied to the product and the applicable share of manufacturing overhead. Cost
is determined on a first-in-first-out basis. Market is generally considered to be replacement cost; however, market is
not permitted to exceed the ceiling (net realizable value) or be less than the floor (net realizable value less a normal
markup). Net realizable value is defined as the estimated selling price in the ordinary course of business, less
reasonably predictable costs of completion and disposal.
The Company’s policy for the valuation of inventory, including the determination of obsolete or excess inventory,
requires management to estimate the future demand for the Company’s products. Inventory purchases and purchase
commitments are based upon such forecasts of future demand and scheduled rollout and life cycles of new products.
The business environment in which the Company operates is subject to rapid changes in technology and customer
demand. The Company performs an assessment of inventory during each reporting period, which includes a review
of, among other factors, demand requirements, component part purchase commitments of the Company and certain
key suppliers, product life cycle and development plans, component cost trends, product pricing and quality issues.
If customer demand subsequently differs from the Company’s forecasts, requirements for inventory write-offs that
differ from the Company’s estimates could become necessary. If management believes that demand no longer
allows the Company to sell inventories above cost or at all, such inventory is written down to net realizable value or
excess inventory is written off. During fiscal 2014, the Company shipped devices to its carrier and distributor
partners to support new and continuing product launches and meet expected levels of end customer demand.
However, the sell-through levels for BlackBerry 10 smartphones decreased significantly during fiscal 2014 due to
the maturing smartphone market, very intense competition and, the Company believes, the uncertainty created by
the Company’s recently completed strategic review process. These factors caused the number of BlackBerry 10
devices in the channel to increase above the Company’s expectations, which in turn caused the Company to reassess
and revise its future demand assumptions for finished products, semi-finished goods and raw materials. The
Company also made the decision to cancel plans to launch two devices to mitigate the identified inventory risk.
Based on these revised demand assumptions, the Company recorded primarily non-cash, pre-tax charges against
inventory and supply commitments of approximately $2.4 billion in fiscal 2014 related to Blackberry 10 devices.
Inventories were comprised of the following:
As at
March 1, 2014
Raw materials
Work in process
Finished goods
March 2, 2013
$
51 $
156
37
271
278
54
$
244 $
603
During fiscal 2014, the Company recorded charges against inventory and supply commitments of approximately
$2.4 billion. The charges included a write-down of inventory of approximately $1.6 billion and supply commitments
of approximately $782 million.
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Exhibit 4
JUDY GENT—INVENTORY
Pactiv Corporation 10-K Inventory-Related Selected Excerpts
Panel A: Report of Independent Registered Public Accounting Firm (partial)
The Board of Directors and Shareholders of Pactiv Corporation
…
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Pactiv Corporation at December 31, 2009 and 2008, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 2009 the Company changed its method of
accounting for inventory and in 2008 the Company adopted the requirement to measure the funded status of its
defined benefit pension and postretirement healthcare plans as of the date of the year-end statement of financial
position.
…
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Exhibit 4 (continued)
Panel B: Consolidated Statement of Income
For years ended December 31
(in millions, except share and per share data)
Sales
Consumer products
Foodservice/Food packaging
Costs and expenses
Cost of sales, excluding depreciation and amortization
Selling, general, and administrative
Depreciation and amortization
Other
Restructuring and other
2009
$
1,285
2,075
3,360
2,241
349
184
7
—
2,781
579
2008 (1)
$
1,342
2,225
3,567
2007 (1)
$
2,638
281
182
6
16
3,123
444
Operating income
Other income (expense)
Interest income
1
2
Interest expense, net of interest capitalized
(94)
(106)
486
340
Income before income taxes
Income tax expense
177
119
309
221
Income from continuing operations
Discontinued operations, net of tax
15
(4)
324
217
Net income
Less: Net income attributable to the noncontrolling interest
1
1
$
323
$
216
Net income attributable to Pactiv
Amounts attributable to Pactiv common shareholders
Income from continuing operations, net of tax
$
308
$
220
Discontinued operations, net of tax
15
(4)
Net income
$
323
$
216
Earnings per share
Weighted-average number of shares of common stock outstanding
Basic
131,967,907
130,925,861
Diluted
133,471,047
132,473,458
Basic earnings per share of common stock attributable to Pactiv
common shareholders
Continuing operations
$
2.33
$
1.68
Discontinued operations
0.12
(0.03)
Total
$
2.45
$
1.65
Diluted earnings per share of common stock attributable to Pactiv
common shareholders
Continuing operations
$
2.31
$
1.66
Discontinued operations
0.11
(0.03)
Total
$
2.42
$
1.63
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
1,221
2,032
3,253
2,325
286
166
7
—
2,784
469
$
$
$
5
(96)
378
133
245
1
246
2
244
243
1
244
130,912,229
132,869,555
$
$
$
$
1.85
0.01
1.86
1.83
0.01
1.84
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Exhibit 4 (continued)
Panel C: Consolidated Statement of Financial Position
At December 31 (in millions, except share data)
Assets: Current assets
Cash and temporary cash investments
Trade, receivables less allowances of $6 and $7 at the respective dates
Other receivables
Total accounts and notes receivable
Inventories—Finished goods
Work in process
Raw materials
Other materials and supplies
Total inventories
Deferred income tax assets
Other
Total current assets
Property, plant, and equipment, net
Other assets—Goodwill
Intangible assets, net
Noncurrent deferred income tax asset
Other
Total other assets
Total assets
Liabilities and equity: Current liabilities
Short-term debt, including current maturities of long-term debt
Accounts payable
Taxes accrued
Interest accrued
Accrued promotions, rebates, and discounts
Accrued payroll and benefits
Other
Total current liabilities
Long-term debt
Deferred income taxes
Pension and postretirement benefits
Other
Noncurrent liabilities related to discontinued operations
Pactiv shareholders’ equity
Common stock—$0.01 par value, 350,000,000 shares authorized,
132,334,417 and 131,510,270 shares issued and outstanding, after deducting 39,448,760 and 40,272,907
shares held in treasury, at the respective dates
Premium on common stock and other capital surplus
Accumulated other comprehensive income (loss)
Currency translation adjustment
Pension and postretirement plans
Gain (loss) on derivatives
Retained earnings
Total Pactiv shareholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
2009
$
2008 (1)
46 $
277
51
328
240
39
63
48
390
53
15
832
1,172
1,135
372
—
63
1,570
$ 3,574 $
80
264
47
311
209
55
78
49
391
—
15
797
1,209
1,128
396
161
70
1,755
3,761
$
5$
144
24
20
73
97
54
417
1,270
61
694
120
11
—
115
14
20
68
66
55
338
1,345
—
1,266
95
30
1
729
1
710
(3)
(1,729)
6
1,981
985
16
1,001
$ 3,574 $
(16)
(1,689)
7
1,658
671
16
687
3,761
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
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Exhibit 4 (continued)
Panel D: Consolidated Statement of Cash Flows (partial)
For the 12 months ended December 31 (in millions)
2009
2008 (1)
2007 (1)
Operating activities
Net income
$ 324 $ 217 $ 246
Discontinued operations
(15)
4
(1)
Income from continuing operations
309
221
245
Adjustments to reconcile income from continuing operations to cash provided (used)
by operating activities:
Depreciation and amortization
184
182
166
Deferred income taxes
208
112
37
Restructuring and other
(1)
12
—
Pension income
(36)
(49)
(50)
Noncash compensation expense
16
16
9
Pension contributions
(550)
—
—
Changes in components of working capital
(Increase) decrease in receivables
(16)
(14)
103
(Increase) decrease in inventories
7
22
4
(Increase) decrease in prepayments and other current assets
1
(2)
—
Increase (decrease) in accounts payable
28
(45)
(26)
Increase (decrease) in taxes accrued
(30)
(66)
(16)
Increase (decrease) in interest accrued
—
(2)
15
Increase (decrease) in other current liabilities
36
(23)
(37)
Other
8
(6)
(5)
Cash provided (used) by operating activities—continuing operations
164
358
445
Cash provided (used) by operating activities—discontinued operations
(3)
(8)
(8)
$ 161 $ 350 $ 437
Cash provided (used) by operating activities
Investing activities
Expenditures for property, plant, and equipment
$(111) $ (136) $ (151)
Acquisitions of businesses and assets
(20)
—
(1,015)
Net proceeds from the sale of a business or assets
—
—
2
Other investing activities
2
(1)
—
$(129) $ (137) $(1,164)
Cash provided (used) by investing activities
Financing activities
Issuance of common stock
$ 6 $
8 $
19
Purchase of common stock
—
(2)
(108)
Issuance of long-term debt, net of discounts
—
—
498
Retirement of long-term debt
—
—
(99)
—
—
432
Revolving credit facility borrowings
Revolving credit facility payment
(70)
(230)
(132)
Dividends paid to noncontrolling interest
(1)
(1)
(1)
Other
(1)
(1)
29
$ (66) $ (226) $ 638
Cash provided (used) by financing activities
Effect of foreign exchange rate changes on cash and temporary cash investments
—
(2)
3
(34)
(15)
(86)
Increase (decrease) in cash and temporary cash investments
Cash and temporary cash investments, January 1
80
95
181
$ 46 $ 80 $
95
Cash and temporary cash investments, December 31
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
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Exhibit 4 (continued)
Panel E: Notes to the Financial Statements
Note 2.
Summary of Accounting Policies (partial)
Inventories
Our inventories are stated at the lower of cost or market using the FIFO method. We periodically review inventory
balances to identify slow-moving and/or obsolete items. This determination is based on a number of factors,
including new product introductions, changes in consumer demand patterns, and historical usage trends. In 2009, we
changed our method of accounting for inventory from a combination of the LIFO method and the FIFO method to
the FIFO method. All of our businesses now use the FIFO method of accounting for inventory. We believe the new
method of accounting for inventory is preferable because the FIFO method better reflects the current value of
inventories on the Consolidated Statement of Financial Position, provides better matching of revenue and expenses
under our business model, and provides uniformity across our operations with respect to the method of inventory
accounting for financial reporting. In accordance with ASC 250-10 “Accounting Changes and Error Corrections,”
all prior periods presented have been retrospectively adjusted to apply the new method of accounting.
The following table presents the line items on the statement of income that were impacted by the accounting change
for the years ended December 31, 2008, and 2007.
(in millions, except per share data)
Cost of sales, excluding depreciation and amortization
Operating income
Income tax expense
Income from continuing operations
Net income attributable to Pactiv
Earnings (loss) per share of common stock:
Basic
Diluted
Year Ended
December 31, 2008
As Originally
Reported
As Adjusted
Year Ended
December 31, 2007
As Originally
Reported
As Adjusted
$2,636
446
120
222
217
$2,638
444
119
221
216
$2,322
472
135
246
245
$2,325
469
133
245
244
$ 1.66
$ 1.64
$ 1.65
$ 1.63
$ 1.87
$ 1.85
$ 1.86
$ 1.84
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Exhibit 4 (continued)
The following table presents the line items on the statement of financial position that were impacted by the
accounting change as of December 31, 2008.
December 31, 2008
As Originally
Reported
As Adjusted
(in millions)
Inventories
Deferred income tax assets
Goodwill
Other current liabilities
Retained earnings
$ 344
14
1,124
50
1,626
$ 391
—
1,128
55
1,658
The following table presents the line items on the statement of cash flows that were impacted by the accounting
change for the years ended December 31, 2008, and 2007.
(in millions)
Year Ended
December 31, 2008
As Originally
Reported
As Adjusted
Net income
Deferred income taxes
(Increase) decrease in inventories
$218
113
20
Year Ended
December 31, 2007
As Originally
Reported
As Adjusted
$217
112
22
$247
38
1
$246
37
4
The following table presents the segment information line items that were impacted by the accounting change for the
years ended December 31, 2008, and 2007.
(in millions)
Operating income (loss)
Consumer products
Foodservice/Food packaging
Other
Total operating income (loss)
Total assets
Consumer products
Foodservice/Food packaging
Other
Total assets
Year Ended
December 31, 2008
As Originally
Reported
As Adjusted
Year Ended
December 31, 2007
As Originally
Reported
As Adjusted
$
$
$
$
$
207
236
3
446
1,307
2,070
348
3,725
$
$
$
$
207
234
3
444
1,326
2,102
333
3,761
$
$
$
227
247
(2)
472
1,345
2,125
295
3,765
$
$
$
$
226
245
(2)
469
1,365
2,159
274
3,798
For a summary of the effect of the retrospective adjustments resulting from the change in accounting principle for
inventory costs for the interim quarters of 2009, see Note 16 to the financial statements.
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UV6849
Exhibit 5
JUDY GENT—INVENTORY
Frontier Oil Corporation 10-K Inventory-Related Selected Excerpts
Panel A: Report of Independent Registered Public Accounting Firm (partial)
To the Board of Directors and Shareholders of Frontier Oil Corporation:
…
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of Frontier Oil Corporation and subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, during the fourth quarter of 2009, the
Company changed its inventory valuation method for crude oil, unfinished products, and finished products to the
last-in, first-out (LIFO) method from the first-in, first-out (FIFO) method.
…
Panel B: Consolidated Statements of Operations
Years Ended December 31,
2008
As
2007
Adjusted
As Adjusted
2009
(Note 3)
(Note 3)
(in thousands, except per share data)
Revenues:
Refined products
Other
$ 4,242,966 $ 6,342,144 $
(5,753)
156,636
4,237,213
6,498,780
5,269,674
(80,934)
5,188,740
(Loss) income before income taxes
(Benefit) provision for income taxes
Net (loss) income
Basic (loss) earnings per share of common stock
3,888,308
5,716,091
321,299
321,364
58,668
44,169
74,308
65,756
(44)
4,342,583
6,147,336
(105,370)
351,444
28,187
15,130
(2,279)
(5,425)
25,908
9,705
(131,278)
341,739
(47,518)
115,686
$ (83,760) $ 226,053 $
$
(0.81) $
2.19 $
4,194,971
300,542
55,343
53,039
(15,214)
4,588,681
600,059
8,773
(21,851)
(13,078)
613,137
210,805
402,332
3.77
Diluted (loss) earnings per share of common stock
$
Costs and expenses:
Raw material, freight and other costs
Refinery operating expenses, excluding depreciation
Selling and general expenses, excluding depreciation
Depreciation, amortization and accretion
Net gains on sales of assets
Operating (loss) income
Interest expense and other financing costs
Interest and investment income
(0.81) $
2.18 $
3.73
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UV6849
Exhibit 5 (continued)
Panel C: Consolidated Balance Sheets
(with selective condensing for case presentation purposes)
December 31,
2008
As adjusted
2009
(Note 3)
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Trade receivables, net of allowance of $1,000 and $500 at 2009 and 2008, respectively
Income taxes receivable
Inventory of crude oil, products and other
Deferred income tax assets—current
Other current assets
Total current assets
Property, plant and equipment, at cost:
Refineries, pipeline and terminal equipment
Furniture, fixtures and other equipment
$ 425,280 $
95,261
174,627
293,476
26,373
22,349
1,037,366
483,532
84,110
116,118
236,505
16,301
68573
1,005,139
1,446,287
17,284
1,463,571
Accumulated depreciation and amortization
(442,162)
Property, plant and equipment, net
1,021,409
Deferred costs
73,202
Intangibles, less accumulated amortization $614 and $492, 2009 and 2008, respectively
1,216
Deferred income tax assets—noncurrent
10,767
Other assets
3,935
Total assets
$ 2,147,895 $
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$ 474,377 $
Accrued liabilities and other
64,799
Total current liabilities
539,176
Long-term debt
347,485
Contingent income tax liabilities
29,348
Post-retirement employee liabilities
33,138
Long-term capital lease obligation
3,394
Other long-term liabilities
20,560
Deferred income tax liabilities
230,818
Commitments and contingencies
Shareholders’ equity:
Common stock, no par, 180,000,000 shares authorized, 131,850,356 shares issued
57,736
Paid-in capital
252,513
Retained earnings
1,030,203
Accumulated other comprehensive loss
(1,234)
Treasury stock, at cost, 27,165,400 and 27,945,884 shares, 2009 and 2008, respectively
(395,242)
Total shareholders’ equity
943,976
Total liabilities and shareholders’ equity
$ 2,147,895 $
1,291,106
15,638
1,306,744
(373,301)
933,443
63392
1,338
2,993
2,006,305
308,867
57,084
365,951
347,220
28,057
31,128
3,548
12,211
179,214
57,736
236,183
1,139,512
(723)
(393,732)
1,038,976
2,006,305
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UV6849
Exhibit 5 (continued)
Panel D: Consolidated Statement of Cash Flows
Years Ended December 31,
2008
2007
As
As
Adjusted
Adjusted
2009
(Note 3)
(Note 3)
(in thousands)
Cash flows from operating activities:
Net income (loss)
$ (83,760) $ 226,053 $ 402,332
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion
93,793
83,571
67,512
Deferred income taxes
31,082
169,766
(60,859)
Stock-based compensation expense
20,608
20,014
22,553
Excess income tax benefits of stock-based compensation
(244)
(3,191)
(6,962)
Amortization of debt issuance costs
1,489
978
769
Senior Notes discount amortization
264
60
Allowance for investment loss and bad debts
500
499
Net gains on sales of assets
(44)
(15,214)
Decrease in long-term commutation account
1,009
Amortization of long-term prepaid insurance
909
1,211
Increase (decrease) in other long-term liabilities
10,829
(3,173)
27,365
Changes in deferred turnaround costs, deferred catalyst costs and other
(31,728)
(28,758)
(29,287)
Changes in components of working capital from operations:
Increase in trade, income taxes and other receivables
(56,041)
(28,801)
(45,018)
(Increase) decrease in inventory
(56,971)
11,107
28,385
Decrease (increase) in other current assets
28,849
(14,984)
(12,724)
Increase (decrease) in accounts payable
175,085
(117,443)
30,312
Increase (decrease) in accrued liabilities and other
7,187
(19,288)
17,629
Net cash provided by operating activities
140,942
297,275
429,013
Cash flows from investing activities:
Additions to property, plant and equipment
(168,670)
(209,381)
(291,174)
Proceeds from sales of assets
46
22,222
El Dorado Refinery contingent earn-out payment
(7,500)
(7,500)
Other acquisitions and leasehold improvements
(2,100)
(3,561)
Net cash used in investing activities
(170,770)
(216,835)
(280,013)
Cash flows from financing activities:
Proceeds from issuance of 8.5% Senior Notes
197,160
Purchase of treasury stock
(3,008)
(67,030)
(248,486)
Proceeds from issuance of common stock
70
405
2,303
Dividends paid
(25,349)
(23,144)
(17,271)
Excess income tax benefits of stock-based compensation
244
3,191
6,962
Debt issuance costs and other
(381)
(4,889)
(588)
Net cash provided by (used in) financing activities
(28,424)
105,693
(257,080)
Increase (decrease) in cash and cash equivalents
(58,252)
186,133
(108,080)
Cash and cash equivalents, beginning of period
483,532
297,399
405,479
Cash and cash equivalents, end of period
$ 425,280 $ 483,532 $ 297,399
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UV6849
Exhibit 5 (continued)
Panel E: Note 2—Significant Accounting Policies (partial)
Inventories
During the fourth quarter of 2009, the Company changed its inventory valuation method for crude oil,
unfinished products and finished products to the last-in, first-out (LIFO) method from the first-in, first-out (FIFO)
method as previously disclosed. See Note 3 “Change in Accounting Principle—Inventory” for additional
information. As a result of the adjustment, the Company’s previously reported December 31, 2008, inventory
balance has decreased by $19.6 million. Inventories of crude oil, unfinished products and all finished products are
now recorded at the lower of cost on a LIFO basis or market, which is determined using current estimated selling
prices. Crude oil includes both domestic and foreign crude oil volumes at its cost and associated freight and other
costs. Unfinished products (work in process) include any crude oil that has entered into the refining process, and
other feedstocks that are not finished as far as refining operations are concerned. These include unfinished gasoline
and diesel, blendstocks and other feedstocks. Finished product inventory includes saleable gasoline, diesel, jet fuel,
chemicals, asphalt and other finished products. Unfinished and finished products inventory values have components
of raw material, the associated raw material freight and other costs, and direct refinery operating expense allocated
when refining begins relative to their proportionate market values. Refined product exchange transactions are
considered asset exchanges with deliveries offset against receipts. The net exchange balance is included in
inventory. Inventories of process chemicals and repairs and maintenance supplies and other are recorded at the lower
of average cost or market. Crude oil inventories, unfinished product inventories and finished product inventories are
used to secure financing for operations under the Company’s revolving credit facility. (See Note 8 “Revolving
Credit Facility.”) The components of inventory as of December 31, 2009 and 2008 were as follows:
December 31,
2008
As
2009
Adjusted
(in thousands)
Crude oil
$ 343,154 $ 121,973
Unfinished products
101,436
55,915
Finished products
94,239
54,332
LIFO reserve—adjustment to inventories
(272,634)
(19,624)
266,195
212,596
Process chemicals
1,162
1,385
Repairs and maintenance supplies and other
26,119
22,524
$ 293,476 $ 236,505
The Company uses the double extension, dollar value approach to price LIFO inventory. A single material
business unit pool is used for all crude oil and unfinished and finished products inventories. An actual valuation of
inventory under the LIFO method is made annually at the end of each fiscal year based on the inventory levels at
that time. Interim LIFO calculations are based on year to date inventory levels at the interim period end. The interim
LIFO calculations are subject to the annual LIFO inventory valuation at year end; accordingly, annual results may
differ from interim results. There were no material liquidations of LIFO inventory layers for the years ended
December 31, 2009 and 2008. During the year ended December 31, 2007, the Company reduced certain inventory
quantities resulting in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years
compared to the cost of 2007 purchases. The effect of these reductions resulted in a decrease of “Raw material,
freight and other costs” of $13.2 million and an increase in “Net income” of $8.2 million after tax or $0.08 per
diluted share in 2007.
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UV6849
121,732
46,237
140,942
140,942
Ne t cash provide d by ope rating
activitie s
$
(56,041 )
(56,971 )
29,470
(309,981 )
$
31,082
39,326
(83,760 )
$
$
–
85,511
(253,010 )
8,244
159,255
(1.53 )
(1.54 )
(159,255 )
(253,010 )
(93,755 )
$
$
$
$
$
$
297,275
245,798
80,894
80,234
0.77
0.78
80,234
107,048
26,814
116,753
5,950,782
$
$
$
$
$
$
297,275
11,107
169,766
226,053
2.18
2.19
226,053
341,739
115,686
351,444
5,716,091
$
$
$
$
$
$
–
(234,691 )
88,872
145,819
1.41
1.41
145,819
234,691
88,872
234,691
(234,691 )
$
$
$
$
$
429,013
(127,351 )
(1,916 )
499,125
4.62
4.67
499,125
768,873
269,748
755,795
4,039,235
As Originally
Reported
$
$
253,010
(253,010 )
Change
(in thousands – except per share data)
As Adjusted
2008
`
75,495
$
$
(0.81 )
(0.81 )
$
$
(83,760 )
(131,278 )
(47,518 )
(105,370 )
3,888,308
Change
As Originally
Reported
Years Ended December 31,
Consolidate d State me nts of Cash Flows:
$
$
$
$
As Reported
under LIFO
Net income
Adjustments to reconcile net income to net
income from operating activities:
Deferred income taxes
Changes in components of working capital
from operations:
Decrease (increase) in trade, income
taxes, and other receivables
Decrease (increase) in inventory
$
0.73
$
$
Basic earnings (loss) per share
Diluted earnings (loss) per share
0.72
75,495
$
Ne t income (loss)
Provision (benefit) for income taxes
Income (loss) before income taxes
3,635,298
147,640
$
Operating income (loss)
Raw material, freight and other costs
Consolidate d State me nts of Ope rations:
As Computed
under FIFO
2009
$
$
$
$
$
$
429,013
28,385
(60,859 )
402,332
3.73
3.77
402,332
613,137
210,805
600,059
4,194,971
As Adjusted
2007
$
$
$
$
$
$
–
155,736
(58,943 )
(96,793 )
(0.89 )
(0.90 )
(96,793 )
(155,736 )
(58,943 )
(155,736 )
155,736
Change
During the fourth quarter of 2009, the Company changed its inventory valuation method for crude oil, unfinished products and finished products to the LIFO
method from the FIFO method as previously disclosed. All of the Company’s other inventories will continue to be valued at the lower of average cost or market.
The Company believes the change to the LIFO method is preferable because it will improve matching of current costs with revenues and improve comparability
with its industry peers. The Company has determined that it is impracticable to determine the cumulative effect of applying this change for years prior to 2001 as
the prior period specific information necessary to value inventory under LIFO was unavailable. Therefore, the Company has retrospectively adjusted the
consolidated financial statements for the change for all periods to the beginning of 2001. As a result of the change in accounting principle, retained earnings as of
January 1, 2007 decreased from $719.8 million, as originally reported under the FIFO method, to $658.6 million under the LIFO method. The following
consolidated financial statement line items as of December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007 were affected by the
change in accounting principle. For 2009, the FIFO numbers are calculated and presented assuming the Company had not adopted the LIFO method.
Panel F: Note 3—Change in Accounting Principle—Inventory (data repositioned for case presentation purposes)
Exhibit 5 (continued)
-27-
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89,116
1,201,622
$
$
Retained earnings
Total liabilitie s and share holde rs’ e quity
2,316,342
227,846
$
Deferred income tax liabilities
2,316,342
–
1,216,580
18,464
566,110
$
$
$
Total asse ts
Deferred income tax assets – long-term
Total curre nt asse ts
Deferred income tax assets – current
Inventory of crude oil, products and other
Income taxes receivable
Consolidate d Balance She e t:
As Computed
under FIFO
$
$
$
$
$
$
2,147,895
1,030,203
230,818
2,147,895
10,767
1,037,366
26,373
293,476
174,627
As Reported
under LIFO
December 31, 2009
$
$
$
$
$
85,511
(168,447 )
(171,419 )
2,972
(168,447 )
10,767
(179,214 )
7,909
(272,634 )
$
$
$
$
$
$
2,018,469
1,151,676
179,214
2,018,469
–
1,017,303
8,841
256,129
116,118
$
$
$
$
$
$
2,006,305
1,139,512
179,214
2,006,305
–
1,005,139
16,301
236,505
116,118
As
Adjusted
Reported
December 31, 2008
As Originally
(in thousands)
Change
Exhibit 5 (continued)
-28-
$
$
$
$
$
–
(12,164 )
(12,164 )
–
(12,164 )
–
(12,164 )
7,460
(19,624 )
Change
UV6849
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