Exercise 6 (20 points) The Walt Disney Company-2008 Annual Report is given below. Answer the questions given at the end of the balance sheet (The Walt Disney Company, together with its subsidiaries, is a diversified worldwide entertaining company with operations in four business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products) CONSOLIDATED BALANCE SHEETS (In millions, except per share data) September 27, 2008 2007 ASSETS Current Assets Cash and cash equivalents $ 3,001 $ 3,670 Receivables 5,373 5,032 Inventories 1,124 641 Television costs 541 559 Deferred income taxes 1,024 862 Other current assets 603 550 Total Current Assets 11,666 11,314 Film and television costs 5,394 5,123 Investments 1,563 995 Parks, resorts and other property, at cost Attractions, buildings and equipment 31,493 30,260 Accumulated depreciation (16,310) (15,145) 15,183 15,115 Projects in progress 1,169 1,147 Land 1,180 1,171 17,532 17,433 Intangible assets, net 2,428 2,494 Goodwill 22,151 22,085 Other assets 1,763 1,484 $ 62,497 $ 60,928 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and other accrued liabilities Current portion of borrowings Unearned royalties and other advances Total current liabilities Borrowings Deferred income taxes Other long-term liabilities Minority interests $ 5,980 3,529 2,082 11,591 11,110 2,350 3,779 1,344 $ 5,949 3,280 2,162 11,391 11,892 2,573 3,024 1,295 Commitments and contingencies (note 14) Shareholders' equity Preferred stock, $.01 par value Authorized-100 million shares, Issuednone Common stock, $.01 par value Authorized3.6 billion shares, Issued-2.6 billion shares Retained earnings Accumulated other comprehensive loss 26,546 28,413 (81) 54,878 24,207 24,805 (157) 48,855 Treasury stock, at cost, 777.1 million shares at September 27, 2008 and 637.8 million shares at September 29, 2007 (22,555) 32,323 $ 62,497 (18,102) 30,753 $ 60,928 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Part) (Tabular dollars in millions, except per share amounts) 1. Description of the Business and Segment Information (In Part) The Walt Disney Company, together with the subsidiaries through which the Company's businesses are conducted (the Company), is a diversified worldwide entertainment company with operations in the following business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products. 2. Summary of Significant Accounting Policies (In Part) Reporting Period The Company's fiscal year ends on the Saturday closest to September 30 and consists of 52 weeks with the exception that approximately every six years, we have a 53-week year. When a 53-week year occurs, the Company reports the additional week in the fourth quarter. Fiscal 2009 is a 53-year beginning on September 28, 2008 and ending on October 3, 2009. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the zfinancial statements and footnotes thereto. Actual results may differ from those estimates. Revenue Recognition Broadcast advertising revenues are recognized when commercials are aired. Revenues from televi- sion subscription services related to the Company's primary cable programming services are recog- nized as services are provided. Certain of the Company's existing contracts with cable and satellite operators include annual live programming commitments. In these cases, recognition of revenues subject to the commitments is deferred until the annual commitments are satisfied, which generally results in higher revenue recognition in the second half of the year. Revenues from advance theme park ticket sales are recognized when the tickets are used. For non-expiring, multi-day tickets, we recognize revenue over a three-year time period based on estimated usage patterns that are derived from historical usage patterns. Revenues from corporate sponsors at the theme parks are generally recognized over the period of the applicable agreements commencing with the opening of the related attraction. Revenues from theatrical distribution of motion pictures are recognized when motion pictures are exhibited. Revenues from video and video game sales, net of anticipated returns and customer incen- tives, are recognized on the date that video units are made available for sale by retailers. Revenues from the licensing of feature films and television programming are recorded when the material is available for telecast by the license and when certain other conditions are met. Merchandise licensing advances and guarantee royalty payments are recognized based on the con- tractual royalty rate when the licensed product is sold by the licensee. Nonrefundable advances and minimum guarantee royalty payments in excess of royalties earned are generally recognized as reve- nue at the end of the contract term. Taxes collected from customers and remitted to governmental authorities are presented in the Consolidated Statements of Income on a net basis. Advertising Expense Advertising costs are expensed as incurred. Advertising expenses for fiscal 2008, 2007, and 2006 were $2.9 billion, $2.6 billion, and $2.5 billion, respectively. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or less. Investments Debt securities that the Company has the positive intent and ability to hold to maturity are classified as "held-to-maturity" and reported at amortized cost. Debt securities not classified as held-to-matu- rity and marketable equity securities are classified as either trading" or "available-for-sale, and are recorded at fair value with unrealized gains and losses included in earnings or accumulated other comprehensive income/loss), respectively. All other equity securities are accounted for using either the cost method or the equity method. The Company regularly reviews its investments to determine whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is judged to be other than temporary, the cost basis of the security is written down to the fair value and the amount of the write-down is included in the Consolidated Statements of Income. Inventories Carrying amounts of merchandise, materials and supplies inventories are generally determined on a moving average cost basis and are stated at the lower of cost or market. 12. Detail of Certain Balance Sheet Accounts September 27, 2008 September 29, 2007 Current receivables Accounts receivable Other Allowance for doubtful amounts $ 5,207 414 (248) $ 5,373 $ 4,724 424 (116) $ 5,032 Other current assets Prepaid expenses Other 446 478 $ 125 603 $ 104 550 Parks, resorts and other property, at cost Attractions, buildings, and improvements Leasehold improvements Furniture, fixtures and equipment Land improvements $ 15,444 553 11,739 3,757 31,493 (16,310) 1,169 1,180 $ 17,532 $ 14,857 500 11,272 3,631 30,260 (15,145) 1,147 1,171 $ 17,433 Accumulated depreciation Projects in progress Land 858 FA $ Intangible assets Copyrights $ 357 $ 357 Other amortizable intangible assets 282 255 Accumulated amortization (198) (143) Net amortizable intangible assets 441 469 FCC licenses 897 Trademarks 1,109 1,108 Other indefinite lived intangible assets 20 20 $ 2,428 $ 2,494 Other noncurrent assets Receivables $ 801 $ 571 Pension related assets 215 275 Prepaid expenses 128 120 Other 619 518 $ 1,763 $ 1,484 Accounts payable and other accrued liabilities $ $ Accounts payable 4,355 4,429 Payroll and employee benefits 1,376 1,290 Other 249 230 $ 5,980 $ 5,949 Other long-term liabilities Deferred revenues $ 320 369 Capital lease obligations 241 274 Program licenses and rights 223 288 Participation and residual liabilities 378 239 Pension and postretirement medical plan liabilities 1,157 966 Other 1,460 888 $ 3,779 $ 3,024 Required a) The statement is entitled Consolidated Balance Sheets. What does it mean to have a consolidated balance sheet? b) What is the gross amount of current receivables at September 27, 2008? c) What is the allowance for doubtful accounts on September 27, 2008? d) Why are some receivables classified as other current assets? e) Intangible assets- why are some amortized and some not amortized? f) What is the accumulated amortization at September 27, 2008? g) What is the total inventory at September 27, 2008? Does the inventory method appear to be conservative? Comment. h) Why are advertising expenses expensed as incurred? i) Revenue recognition; comment on the following: 1) Broadcast advertising revenues 2) Revenues from advance theme park ticket sales 3) Revenues from the theatrical distribution of motion pictures 4) Merchandise licensing advances and guarantee royalty payments 5) Why the use of several revenue recognition methods? 6) Are the revenue recognition methods industry-specific