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recover $50 out of the $1, 100 owed by the customer. As a result of this transaction, which Dockery recorded correctly: a. Total assets don't change. b. There is a decrease in total assets. c. There is a decrease in shareholders' equity. d. Both a. and c. are correct. e. Both b. and c. are correct. 7. Piccadilly, Inc. sells gift cards which can be redeemed for store merchandise. These cards expire one year after their issuance. Below is some information about Piccadilly's gift cards: 31/12/2014 31/12/2013 Unearned Revenue E25,000 20,000 Gift cards sold in fiscal year 127,000 125,000 a. The amount of revenue recognized in fiscal year 2014 was $122,000 of which $102,000 relates to gift cards sold during 2014. b . The amount of revenue recognized in fiscal year 2014 was $122,000, of which $97,000 relates to gift cards sold during 2014. C. The amount of revenue recognized in fiscal year 2014 was $132,000, of which $107,000 relates to gift cards sold during 2014. d. The amount of revenue recognized in fiscal year 2014 was 132,000, of which $1 12,000 relates to gift cards sold during 2014. e. The amount of revenue recognized in fiscal year 2014 was $120,000, of which $100,000 relates to gift cards sold during 2014. 2Part II: Revenues: Cash Flows and Accruals Costco Wholesale Corporation is an American multinational corporation that operates a chain of membership- only warehouse clubs. Upon purchase of one-year memberships, Costco members can buy at discounted prices a selection of products in a wide range of categories (e.g., groceries & household, health & beauty, wines Sc spirits, appliances, electronics, computers etc.). Costco's objective is to generate high sales volumes and rapid inventory turnover while achieving operating efciencies by volume purchasing, efcient distribution and reduced handling ofmerchandise in no-frills, self-service warehouse facilities. Using the information contained in the excerpts of Costco's annual report on pages 6-8, please answer the following questions. Note: 0 (Fiscal) year 2019 refers to the 52 weeks ending in September 1, 2019. o The amounts are in millions. REQUIRED: a) Briey describe how Costco accounts for membership fees. [2 marks] b) How much revenue did Costco recognise in fiscal year 2019? Out of this revenue, what percentage was due to recognition of membership fees? [4 marks] c) What percentage of the membership fees recorded as revenue in 2019 is due to memberships initiated or renewed during scal year 2019'? [6 marks] (1) Assume that instead of using the revenue recognition method described on page 8, Costco used the method of recording its membership fees as revenue upon collection of the fees. What would the effect of such an accounting treatment be on the following items (state your answer as overstated by..., understated by... , no effect): Current Assets Current Liabilities Cash Flows from Operations Net Income Retained Earnings [5 marks] e) In certain countries, Costco's top customers (Executive Members) qualify for a 2% reward on qualified purchases, which does not expire. How does Costco account for this loyalty scheme? [2 marks] g) Assume that in 2019 Costco's Executive Members redeemed rewards for a total value of $175 (millions). How much did the company accrue for member rewards in 2019? What was the effect of the loyalty scheme on Costco's 2019 revenues? Explain. [6 marks] Costco has agreements to receive rebates (money back) from their suppliers upon reaching pre-specified sale volumes. Discuss the alternative ways in which Costco could report these rebates. In your opinion, which of these alternatives reects better the economic substance of the rebates? Explain. [7 marks] [T otal: 32 marks] COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) 52 Weeks Ended 52 Weeks Ended 53 Weeks Ended September 1, September 2, September 3, 2019 2018 2017 REVENUE Net sales 149,351 $ 138,434 $ 126,172 Membership fees 3,352 3,142 2,853 Total revenue 152,703 141,576 129,025 TING EXPEN Merchandise costs 132,886 123, 152 111,882 Selling, general and administrative 14,994 13,876 12,950 Preopening expenses 86 68 82 Operating income 4,737 4,480 4,111 OTHER INCOME (EXPENSE) Interest expense (150) (159) (134) Interest income and other, net 178 121 62 INCOME BEFORE INCOME TAXES 4,765 4,442 4,039 Provision for income taxes 1,061 1,263 1,325 Net income including noncontrolling interests 3,704 3,179 2,714 Net income attributable to noncontrolling interests (45) (45) (35) NET INCOME ATTRIBUTABLE TO COSTCO $ 3,659 $ 3, 134 $ 2,679 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic 8.32 $ 7.15 $ 6.11 Diluted 8.26 7.09 $ .08 Shares used in calculation (000's) Basic 439,755 438,515 438,437 Diluted 442,923 441,834 440,937 UCONSOLIDATED BALANCE SHEETS (amounts in millions, except par value and share data) September 1, September 2, 2019 2018 ASSETS CURRENT ASSETS Cash and cash equivalents 8,384 $ 6,055 Short-term investments 06 1.204 Receivables, net 1,535 1,669 Merchandise inventories 11,395 11,040 Other current assets 1,111 321 Total current assets 23,485 0.289 PROPERTY AND EQUIPMENT Land 6,417 6,193 Buildings and improvements 17,136 16, 107 Equipment and fixtures 7,801 7,274 Construction in progress 1,272 1, 140 32,626 30,714 Less accumulated depreciation and amortization (11,736) (11,033) Net property and equipment 20,890 19,681 OTHER ASSETS 1,025 860 TOTAL ASSETS $ 45,400 40,830 LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable 11,679 $ 11,237 Accrued salaries and benefits 3,176 2,994 Accrued member rewards 1,18 1,057 Deferred membership fees 1,711 1,624 Current portion of long-term deb 1,699 90 Other current liabilities 3,792 2,924 Total current liabilities 23,237 19,926 LONG-TERM DEBT, excluding current portion 5, 124 6,487 OTHER LIABILITIES 1,455 1,314 Total liabilities 29,816 27,727 COMMITMENTS AND CONTINGENCIES EQUITY Preferred stock $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding 0 Common stock $0.01 par value; 900,000,000 shares authorized; 439,625,000 and 438, 189,000 shares issued and outstanding Additional paid-in capital 6,417 6, 107 Accumulated other comprehensive loss (1,436) (1, 199) Retained earnings 10,258 7,887 Total Costco stockholders' equity 15,243 12,799 Noncontrolling interests 341 304 Total equity 15,584 13,103 TOTAL LIABILITIES AND EQUITY $ 45,400 40,830 6Excerpts from Costco's revenue recogyition policy: REVENUE Recognion The Company recognizes sales for the amount of consideration collected from the member, which includes gross shipping fees where applicable. and is net of sales taxes collected and remitted to government agencies and returns. The Company reserves for estimated retums based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company recordsI on a gross basis, a refund liability and an asset for recovery. which are included in other current liabilities and other current assets. respectively. in the consolidated balance sheets. Merchandise Sales - The Company offers merchandise in the following core merchandise categories: food and sundries. hardlines. solines. and fresh foods. The Company also provides expanded products and services through warehouse ancillary and other businesses. The majority of revenue from merchandise sales is recognized at the point of sale. Revenue generated through e-commerce or special orders is recognized upon shipment to the member to the extent there is no installation provided as a part of the contract. For merchandise shipped directly to the member. shipping and handling costs are expeneed as incurred as fulllment costs and included in merchandise costs in the consolidated statements oi income. In certain ancillary businesses. revenue is deferred until the member picks up merchandise at the warehouse. Deferred sales are included in other current liabilities in the consolidated balance sheets. Membership Fees - The Company accounts for membership fee revenue. net of refunds. on a deferred basis. ratany over the one-year membership period. Deferred membership fees at the end of 2o19 and 2018 were $1.7'11 and $1.624. respectively. In certain countries. the Company's Executive members qualify for a 2% reward on qualied purchases {up to a maximum of approximately $1.000 per year). which does not expire and can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales. net of the estimated impact of non-redemptions {breakage}. with the ceirresponding liability classied as accnied member rewards in the consolidated balance sheets. Estimated breakage is computed based on redemption date. For 2019. 2015 and 201?. the net reduction in sales was $1.537. $1,394. and $1,231 respectively. Part IV: Assets Netix, Inc. is an American media-services provider and production company. The company's primary business is its subscription-based streaming service which offers online streaming of a library of films and television programs, including those produced in-house. As of April 2020, Netix had over 182 million paid subscriptions worldwide. Please find excerpts of Netflix's annual report on pages 10- 12. Use the information contained in those excerpts, as well as the assumptions listed below, to answer the following questions. Note: I The amounts are in thousands. o No impairment of long-term assets has been recorded over the years. REQUIRED: a) Netix's main asset class is \"content assets.\" What do those assets represent? Why are they mostly non-current? [3 marks] b) How much cash did Netix spend in 2019 in acquiring or developing content assets? Hint: This cash payment is part of cash flows from operations. [5 marks] c) What was the amortization expense for content assets in 2019? What percentage of that amortization relates to non-current content assets? [5 marks] d) Does Netflix use a straight-line, accelerated or decelerated amortization method to amortize content assets? Explain. Why do you think it uses such a method? [6 marks] e) Under which expense account do you think Netix presents the amortization expense of content assets in the income statement? State the expense account and explain. [6 marks] f) In April 2020, Netix confirmed a surge in subscribers as millions of people around the world were still under lockdown due to the coronavirus. However, it indicated that its content could be negatively affected. How do you expect the coronavirus crisis to affect Netix's content assets and liabilities? Explain. [7 marks] [T otal: 32 marks] CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) As of December 31, 2019 2018 Assets Current assets: Cash and cash equivalents S 5,018,437 $ 3,794,483 Current content assets, net 5,151,186 Other current assets 1,160,067 748,466 Total current assets 6,178,504 9.694,135 Non-current content assets, net 24,504,567 14,951,141 Property and equipment, net 565.221 418.281 Other non-current assets 2,727,420 910.843 Total assets 33,975.712 $ 25,974.400 Liabilities and Stockholders' Equity Current liabilities: Current content liabilities $ 4,413,561 $ 4,681,562 Accounts payable 674.347 562.985 Accrued expenses and other liabilities 843,043 181,874 Deferred revenue 924,745 760,899 Total current liabilities 6,855,696 6,487,320 Non-current content liabili 3,334,323 3,759,026 Long-term debt 14,759,260 10,360,058 Other non-current liabilities 1,444,276 129,231 Total liabilities 26,393.555 20, 735.635 Commitments and contingencies (Note 5) Stockholders' equity: Preferred stock, $0.001 par value; 10,000,000 shares authorized at December 31, 2019 and 2018; no shares issued and outstanding at December 31, 2019 and 2018 Common stock, $0.001 par value; 4,990,000,000 shares authorized at December 31, 2019 and December 31, 2018, respectively, 438,806,649 and 436,598,597 issued and outstanding at December 31, 2019 and December 31, 2018, respectively 2,793,929 2,315,988 Accumulated other comprehensive loss (23,521) (19,582) Retained earnings 4,811,749 2,942,359 Total stockholders' equity 7,582.157 5,238,765 Total liabilities and stockholders' equity S 33,975,712 25,974,400 9CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2019 201 2017 Cash flows from operating activities: Net income $ 1,866,916 $ 1,211,242 $ 558.929 Adjustments to reconcile net income to net cash used in operating activities: Additions to streaming content assets (13,916,683) (13,043,437) (9,805,763) Change in streaming content liabilities (694,011) 999,880 900,006 Amortization of streaming content assets 9,216,247 7,532,088 6,197,817 Depreciation and amortization of property, equipment and intangibles 103,579 83,157 71,911 Stock-based compensation expense 405,376 320,657 182,209 Other non-cash items 228,230 81,640 17,864 Foreign currency remeasurement loss (gain) on long-term debt (45,576) (73,953) 140,790 Deferred taxes (94,443) (85,520) (208,688) Changes in operating assets and liabilities: Other current assets 252,113) 200,192) (234,090) Accounts payable 96,063 199 198 74 559 Accrued expenses and other liabilities 157,778 150,422 114,337 Deferred revenue 163,846 142,277 177.974 Other non-current assets and liabilities (122,531) 2,062 73,803) Net cash used in operating activities 2,887,322 (2,680,479) (1,785.948) Cash flows from investing activities: Purchases of property and equipment (253,035) (173,946) (173,302) Change in other assets (134,029) (165,174) (60.409) Purchases of short-term investments 74,819) Proceeds from sale of short-term investments 320,154 Proceeds from maturities of short-term investments 22, 705 Net cash provided by (used in) investing activities (387,064) (339,120) 34.329 Cash flows from financing activities: Proceeds from issuance of debt 4,469,306 3,961,852 3,020,510 Debt issuance costs (36,134) (35,871) 32,153) Proceeds from issuance of common stock 72,490 124,502 38.378 Other financing activities (1,956) 255 Net cash provided by financing activities 4,505,662 4,048 527 3,076.990 Effect of exchange rate changes on cash, cash equivalents and restricted cash 469 (39,682) 29.848 Net increase in cash, cash equivalents and restricted cash 1,231,745 989,246 1,355.219 Cash, cash equivalents and restricted cash, beginning of year 3,812,041 2,822,795 1,467,576 Cash, cash equivalents and restricted cash, end of year 5,043,786 $ ,812,041 $ 2,822,795 Supplemental disclosure: Income taxes paid 400,658 131,069 113,591 Interest paid 599,132 375,831 213,313 10Select Exeemts from Netix's Notes to the Statements Streaming Content The Company acquires, licenses and produces content, including original programming, in order to offer members unlimited viewing of TV series and lms. The content licenses are for a xed fee and specic windows of availability. Payment terms for certain content licenses and the production of content require more up'ont cash payments relative to the amortization expense. Payments for content, including additions to streaming assets and the changes in related liabilities, are classied within "Net cash used in operating activities\" on the Consolidated Statements of Cash Flows. The Company recognizes content assets (licensed and produced) as \"Noncurrent content assets, net\" on the Consolidated Balance Sheets. For licenses, the Company capitalizes the fee per title and records a corresponding liability at: the gross amount: of the liability when the license period begins, the cost: of the title is blown and the title is accepted and available for streaming. For productions, the Company capitalizes costs associated with the production, including development costs, direct costs and production overhead Participations and residuals are expensed in line with the amortization of production costs. 3. Balance Sheet Components Cowl/Users Content assets consisted of the illowing: As of December 31, 2019 2018 (in thousands) Licensed content, net $ 14,203,352 $ 14,081,463 Produced content, net Released less amortization 4,382,685 2,403,896 In production 4,250,664 3,305,126 In deveth and preproduction 667,866 311,842 9,801,215 6,020,864 Total 3 24,504,562 3 20,102,322 Cnrrentcontmrtasetsgtet 3 3 5,151,186 Noncurrent content assets, net 3 24,504,562 3 14,951,141 As ofDecember 31, 2019, approximately $5,793 million, $3,733 million, and $2,518 million ofthe $14,103 million unamortized cost of the licensed content is expected to be amortized in each of the next three years. As ofDecember 31, 2019, approximately $1,552 million, $1,187 million, and $882 million ofthe $4,383 million unamortized cost of the produced content that has been released is expected to be amortized in each of the next three years. As of December 31, 2019, the amount of accrued participations and residuals was not material. The following table represents the amortization of streaming content assets: Year ended December 31, 2019 2018 201'? (in thousands) Licensed content 3 7,242,799 $ 6,511,689 $ 5,680,373 Produced content 1,973,448 1,020,399 517,444 Total streaming content 5 9,216,247 $ 7,532,088 $ 6,192,812 11