P7-45. Reformulating Financial Statements for Warranty Expense ANALYST ADJUSTMENTS 7.1 Ford Motor Company reported the following information in its 2018 financial statements. Use these data to answer the requirements. Dec. 31, 2016 $4,558 (3,286) Dec. 31, 2017 Dec. 31, 2018 $4,960 $5,296 (3,457) (4,360) Warranty Liability, 12 Months Ended ($ millions) Beginning balance .. Payments made during the period Changes in accrual related to warranties issued during the period Changes in accrual related to pre-existing warranties Foreign currency translation and other. Ending balance. 2,326 1,360 2 2,260 1,415 118 2,584 1,758 (141) $5,137 $4,960 $5,296 The income statement reports the following additional information. 12 Months Ended ($ millions) Automotive revenues Financial services revenues Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 $141,547 $145,653 $148,294 10,253 11,113 12,018 $151,800 $156,766 $160,312 Total revenues a. What is the motivation for analysts to consider reformulating financial statements for warranty expenses? b. Which type of revenue (Automotive or Financial Services) is related to warranty expense? Explain. c. Reformulate the income statement for all three years under the assumption that warranty expense is a constant percentage of revenue across all three years. Specifically, compute adjustments to: warranty expense, income tax expense, and net income. Assume the company's tax rate is 22%. d. Reformulate the balance sheet for all three years. Specifically, compute adjustments to: warranty li- abilities, deferred tax assets, and retained earnings. Assume the company's tax rate is 22%. P7-45. Reformulating Financial Statements for Warranty Expense ANALYST ADJUSTMENTS 7.1 Ford Motor Company reported the following information in its 2018 financial statements. Use these data to answer the requirements. Dec. 31, 2016 $4,558 (3,286) Dec. 31, 2017 Dec. 31, 2018 $4,960 $5,296 (3,457) (4,360) Warranty Liability, 12 Months Ended ($ millions) Beginning balance .. Payments made during the period Changes in accrual related to warranties issued during the period Changes in accrual related to pre-existing warranties Foreign currency translation and other. Ending balance. 2,326 1,360 2 2,260 1,415 118 2,584 1,758 (141) $5,137 $4,960 $5,296 The income statement reports the following additional information. 12 Months Ended ($ millions) Automotive revenues Financial services revenues Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 $141,547 $145,653 $148,294 10,253 11,113 12,018 $151,800 $156,766 $160,312 Total revenues a. What is the motivation for analysts to consider reformulating financial statements for warranty expenses? b. Which type of revenue (Automotive or Financial Services) is related to warranty expense? Explain. c. Reformulate the income statement for all three years under the assumption that warranty expense is a constant percentage of revenue across all three years. Specifically, compute adjustments to: warranty expense, income tax expense, and net income. Assume the company's tax rate is 22%. d. Reformulate the balance sheet for all three years. Specifically, compute adjustments to: warranty li- abilities, deferred tax assets, and retained earnings. Assume the company's tax rate is 22%
