Analyzing and Interpreting Income Components and Disclosures The income statement for Xerox Corporation follows.

Year ended December 31 (in millions)	2008	2007	2006
Revenues
Sales	$8,325	$8,192	$7,464
Service, outsourcing and rentals	8,485	8,214	7,591
Finance income	798	822	840
Total Revenues	17,608	17,228	15,895
Cost and expenses
Cost of sales	5,519	5,254	4,803
Cost of service, outsourcing and rentals	4,929	4,707	4,328
Equipment financing interest	305	316	305
Research, development, and engeineering expenses	884	912	922
Selling, administrative and general expenses	4,534	4,312	4,008
Restructuring and asset impairment charges	429	(6)	385
Acquisition-related costs	--	--	--
Amortization of intangible assets	54	--	--
Other expenses, net	1,033	295	336
Total Cost and Expenses	17,687	15,790	15,087
Income (Loss) before Income Taxes, and Equity Income	(79)	1,438	808
Income tax expenses (benefits)	(231)	400	(288)
Equity in net income of unconsolidated affiliates	113	97	114
Net income	265	1,135	1,210
Less: Net income attributable to noncontrolling interests	35	--	--
Net Income attributable to Xerox	$230	$1,135	$1,210

Notes:

The income statement includes sales of Xerox copiers and revenue earned by a finance subsidiary that provides loan and lease financing relating to the sales of these copiers.

Equity in net income of unconsolidated affiliates refers to income Xerox earned on investments in affiliated (but unconsolidated) companies.

(a) Which of the following best describes how sales, service, and finance revenues should be recognized?

Sales, service, and finance revenues are recognized when earned, regardless of when cash is collected.

Sales, service, and finance revenues should be recognized when cash is collected.

Sales and service revenues are recognized when the sale is made or the service is performed. Finance revenues are recognized when the loan is initially made.

Sales and finance revenues are generally recognized when the sale is made and the loan is extended to the customer. Service revenues are deferred until the end of the service contract, at which time they are recognized in full.

(b) Compute the relative size of Sales revenue (total) and of revenue from Service, outsourcing and rentals. Hint: Scale each type of revenue by Total revenue.

	Revenue in $ millions				As % of Total Revenue (Round percents to one decimal place)
	2008	2007	2006		2008	2007	2006
Sales	$Answer	$Answer	$Answer		Answer%	Answer%	Answer%
Service, outsourcing and rentals	$Answer	$Answer	$Answer		Answer%	Answer%	Answer%
Total Revenues	$Answer	$Answer	$Answer

(c) Xerox reports research, development and engineering expenses (R&D) each year. Compare R&D spending over the three years. Hint: Scale R&D by Total revenue each year.

	in $ millions				As % of Total Revenue (Round percents to one decimal place)
	2008	2007	2006		2008	2007	2006
R&D expenses	$Answer	$Answer	$Answer		Answer%	Answer%	Answer%
Total Revenues	$Answer	$Answer	$Answer

What statement provides the best explanation for the R&D expense as a % of total revenue trend we calculated above?

R&D expense percentage remained fairly constant over the three years, because R&D expense increased as sales increased.

Although R&D expense has decreased each year, so has total revenue, so the percentage as remained fairly constant.

R&D spending has decreased each year, while total revenue has increased each year.

Although R&D expense decreased in 2008, so did total revenue, so the percentage actually increased.

(d) Which of the following statements best summarizes our observations about Xerox's reported restructuring costs?

Negative restructuring expense implies that a previous year's restructuring accrual was understated.

Restructuring costs should be treated as transitory regardless of their frequency of occurrence.

Restructuring costs should be expensed in the period the restructuring program is announced, regardless of when they are paid or when the assets are formally written off.

Restructuring costs should only be expensed when paid or when the asset is formally written off.

(e) Which of the following best summarizes our conclusion about the potential use of "other expense" accounts to obscure actual financial performance.

We need not worry about the reporting of "other expense" accounts because the threshold for materiality is so low that the majority of items are not classified in such accounts.

Companies are not required to separately disclose revenue and expense items unless they are deemed to be material. Such aggregation may reduce the usefulness of income statements.

Companies are not allowed to commingle income increasing and income decreasing accounts as this would reduce the usefulness of such an account.

GAAP does not permit the use of "other expense" accounts because they are not specific enough.