Friedman, Billings, Ramsey Research (FBR), an Arlington-based research firm, recently came to "troubling conclusions" about the way warranty provisions are accounted for at DELL. FBR reports that DELL's accounting for warranty accruals "has caused [earnings per share] overstatement of [on average 5] cents in five of the last 12 quarters [ending in 2006]." To understand the impact of this information on DELL's financial statements, you should consider the information from the 10-Q form (quarterly report) of DELL in year 2005 (see Exhibit 1). Required Q3a: Assuming that DELL maintains the quality of its products, then the "true" amount of warranty provisions (i.e., costs accrued for new warranties) can be seen as a constant percentage of current revenues. Historically the ratio of warranty provisions to revenues from product licenses was 2.1%. Provide your estimate of the amount by which DELL may have overstated its earnings in 2004 and 2005. Show all calculation steps. Note: the income statement for DELL can be found in Exhibit 2. (6 marks) 4 (Please turn over) Q3b: Consider the information on revenue recognition in Exhibits 1, 2 and 3. DELL generates revenues from the sale of product licenses and revenues from product support and other services, which include revenues from extended warranty and service contracts. Is there evidence that DELL might accelerate sales from product support and other services? What financial statement items will you adjust to reverse the accelerated recognition of revenue from the extended warranty and service contracts