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

Year ended December 31 (in millions)	2010	2009	2008
Revenue
Equipment sales	$3,857	$3,550	$4,679
Supplies, paper and other	3,377	3,096	3,646
Sales	7,234	6,646	8,325
Service, outsourcing and rentals	13,739	7,820	8,485
Finance income	660	713	798
Total Revenues	21,633	15,179	17,608
Cost and expenses
Cost of sales	4,741	4,395	5,519
Cost of service, outsourcing and rentals	9,195	4,488	4,929
Equipment financing interest	246	271	305
Research, development and engeineering expenses	781	840	884
Selling, administrative and general expenses	4,594	4,149	4,534
Restructuring and asset impairment charges	483	(8)	429
Acquisition-related costs	77	72	--
Amortization of intangible assets	312	60	54
Other expenses, net	389	285	1,033
Total Cost and Expenses	20,818	14,552	17,687
Income (Loss) before Income Taxes, and Equity Income	815	627	(79)
Income tax expenses (benefits)	256	152	(231)
Equity in net income of unconsolidated affiliates	78	41	113
Net income	637	516	265
Less: Net income attributable to noncontrolling interests	31	31	35
Net Income attributable to Xerox	$606	$485	$230

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 should be recognized when cash is collected.

Sales, service, and finance revenues are recognized when earned, regardless of 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)
	2010	2009	2008		2010	2009	2008
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)
	2010	2009	2008		2010	2009	2008
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?

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

B. R&D spending decreased in the current year, while total revenues increased.

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

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

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

A. 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.

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

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

D. 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.

A. 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.

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

C. 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.

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