Question 36

XYZ is a manufacturer of consumer household products. During the current year, XYZ reported the following:

$6.2 billion in accrued and other liabilities

$49.0 billion in revenues

Accrued and other liabilities equaled 12.6% of total revenues.

Supplemental Financial Information from the Annual Report of XYZ

Accrued and other Liabilities Current Liabilities Amounts are in $ million

Marketing and promotion	2,883
Compensation expenses	1,846
Accrued PQR exit costs (Note A)	456
Taxes payable	922
Other	102
Total	6,159

Note A This is a result form severance costs due to acquisition of PQR, a consumers product firm in the prior year.

Using the information from above for Accrued and Other Liabilities Current Liabilities, discuss why a forecast ratio of 12.6% going forward would distort your forecast of free cash flow.

What is the best way to reorganized the Statement of Financial Position to prevent this distortion?