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

Year ended December 31 (in millions)	2007	2006	2005
Revenues
Sales	$8,192	$7,464	$7,400
Service, outsourcing and rentals	8,214	7,591	7,426
Finance income	822	840	875
Total Revenues	17,228	15,895	15,701
Cost and expenses
Cost of sales	5,254	4,803	4,695
Cost of service, outsourcing and rentals	4,707	4,328	4,207
Equipment financing interest	316	305	326
Research, development, and engeineering expenses	912	922	943
Selling, administrative and general expenses	4,312	4,008	4,110
Restructuring and asset impairment charges	(6)	385	366
Other expenses, net	295	336	224
Total Cost 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	1,438	808	830
Income tax expenses (benefits)	400	(288)	(5)
Equity in net income of unconsolidated affiliates	97	114	98
Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle	1,135	1,210	933
Income from Discontinues Operations, net of tax	--	--	53
Cumulative Effect of Change in Accounting Principle, net of tax	--	--	(8)
Net Income	$1,135	$1,210	$978

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.

Xerox tax expense was reduced in 2005 as a result of an audit. The company makes the following disclosure in its footnotes: "In June 2005, the 1996-1998 IRS audit was finalized. As a result, we recorded an aggregate second quarter 2005 net income benefit of $343."

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

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.

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

1.00 points out of 1.00

(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)
	2007	2006	2005		2007	2006	2005
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)
	2007	2006	2005		2007	2006	2005
R&D expenses	$Answer	$Answer	$Answer		Answer %	Answer %	Answer %
Total Revenues	$Answer	$Answer	$Answer