The income statement for Xerox Corporation follows

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a. Xerox reports three main sources of income: sales, service, and finance income. How should revenue be recognized for each of these business activities? Explain.

b. Xerox reports research and development (R\&D) expenses of \(\$ 912\) million in 2007 , which is \(5.3 \%\) of its total revenues. How are \(R \& D\) expenses accounted for under GAAP?

c. Xerox reports restructuring costs of \(\$(6)\) million in 2007 , \(\$ 385\) million in 2006, and \(\$ 366\) million in 2006. (1) Describe the three typical categories of restructuring costs and the accounting for each. (2) How do you recommend treating these costs for analysis purposes? (3) Should regular recurring restructuring costs be treated differently than isolated occurrences of such costs for analysis purposes? (4) What does the \(\$(6)\) expense in 2007 imply about one or more previous year's accruals?

d. Xerox's tax expense was reduced as a result of a \(\$ 343\) million favorable IRS ruling in 2005 . How should this benefit be treated in your analysis of the company?

e. Xerox reports \(\$ 295\) million in expenses in 2007 labeled as 'Other expenses, net.' How can a company use such an account to potentially obscure its actual financial performance?

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Year ended December 31 (in millions) 2007 2006 2005 Revenues Sales..... $ 8,192 Service, outsourcing and rentals Finance income Total Revenues Costs and Expenses Cost of sales..... Cost of service, outsourcing and rentals. Equipment financing interest.... Research, development and engineering expenses Selling, administrative and general expenses 8,214 $ 7,464 7,591 $ 7,400 7,426 8221 840 875 17,228 15,895 15,701 5,254 4,803 4,695 4,707 4,328 4,207 316 305 326 912 922 943 4,312 4,008 4,110 Restructuring and asset impairment charges (6) 385 366 Other expenses, net.... 295 336 224 Total Costs and Expenses. 15,790 15,087 14,871 Income from Continuing Operations before Income Taxes, Equity Income, Discontinued Operations and Cumulative Effect of Change in Accounting Principle.. Income tax expenses (benefits).... Equity in net income of unconsolidated affiliates.. 1,438 808 830 400 (288) (5) 97 114 98 Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle.. Income from Discontinued Operations, net of tax.... Cumulative Effect of Change in Accounting Principle, net of tax 1,135 1,210 933 53 - (8) Net income $ 1,135 $ 1,210 $ 978