Required (a) Understanding the reporting of long-lived assets at inception requires distinguishing between expenditures that are capitalized and those that are expensed. Explain how the cost model and the revaluation model work (20 marks) (b) Selected excerpts from the consolidated financial statements and notes to same for Alcatel-Lucent (NYSE: ALU) are presented in the tables below () Calculate ALU's inventory tunover, number of days of inventory on hand, gross profit margin, current ratio, debt-to-cquity ratio, and return on total assets for 2016 and 2017 based on the numbers reported. Use an average for inventory and total asset amounts and year-end numbers for other ratio items. For debt, include only bonds and notes issued, long-term; other long-term debt; and current portion of long-term debt. (ii) Based on the answer to (), comment on the changes between 2016 and 2017 i IfALU had used the weighted average cost method instead of the FIFO method during 2017, 2016, and 2015, what would be the effect on ALU's reported cost of sales and inventory carrying amounts? What would be the directional impact on the financial ratios that were calculated for ALU in (0? (30 marks) Note 1 (i) discloses that ALU's finished goods inventories and work in progress are valued at the lower of cost or net realizable value Note 2 (a) discloses that the impact of inventory and work in progress write-downs on ALU's income before tax was a net reduction of 285 million in 2017, a net reduction of E186 million in 2016, and a net reduction of E77 milion in 2015. The inventory impairment loss amounts steadily increased from 2015 to 2017 and are included as a component, (additions) reversals, of ALU's change in valuation allowance as disclosed in Note 19 (b). Observe also that ALU discloses its valuation allowance at 31 December 2017, 2016, and 2015 in Note 19 (b) and details on the allocation of the allowance are included in Note 19 (a). The E654 million valuation allowance is the total of a E629 mion allowance for inventories and a 25 million allowance for work in progress on construction contracts. Finally, observe that the 2,196 million net value for inventories (excluding construction contracts) at 31 December 2017 in Note 19 (a) reconciles with the balance sheet amount for inventories and work in progress, net, on 31 December 2017 The inventory valuation allowance represents the total amount of inventory write- downs taken for the inventory reported on the balance sheet (which is measured at the lower of cost or net realizable value). Therefore, an analyst can determine the historical cost of the company's inventory by adding the inventory valuation allowance to the reported inventory carrying amount on the balance sheet. The valuation allowance increased in magnitude and as a percentage of gross inventory values from 2015 to 2017 Table 1 Alcatel Lucent Consolidated Income Statements ( millions For Years Ended 31 December 2017 2016 2015 Cost ofsales 190 083 4,068 Administrative and selling expenses (3,093) (3,462(1,911 954 Income from operating activities before restructuring costs, impairment of assets, gain/(loss) on disposal of entities, and Restructuring costs Impairment of assets (56) 687 ent benefit plan amendments 856 2,944 707 4,725) al of consolidated entities Postretirement benefit plan amendments Income (oss) from operating activities (5,303) Income (loss) from continuing operations Income (loss) from discontinued operations Net income (oss) 4,08 158 3,477 Table 2 Alcatel Lucent Consolidated Balance Sheets (E millions Year Ended 31 December 2017 2016 2015 25,665 Total noncurrent assets Inventories and work in Amounts due from customers on construction contracts Trade receivables and related accounts, net Advances ard 20,135 2,196 495 704 Total current assets Total assets 13,695 33,830 41,890 Retained earnings, fair value, and other reserves Total shareholders' equit 4,807 4,447 5,449 benefits Bonds and notes issued, long-term Other long term debt Deferred tax liabilities Other noncurrent liabilities Total noncurrent liabilities Provisons 4,90 1,89 443 366 13,356 2,5662,366 2,424 ,09 on oflong.term debt Customers' deposits and advances Amounts due to customers on construction contracts Trade payables and related accounts Liabilities related to di Current income tax liabilities Other current liabilities Total current liabilities Total liabilities and shareholders' equit s held for sale 606 185 70 ,934 11,687 0,8532,21 33,830 41,890 Table 3 Alcatel-Lucent Selected Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies i) Inventories and work in progress Inventories and work in progress are valued at the lower of cost including indirect production costs where applicable) or ne realizable value. Net realizable value is the estimated sales reverue for a normal period of activity less expected completion and selling costs. Note 2. Principal Uncertainties Regarding the Use of Estimates (a) Valuation allowance for inventories and work in progress Inventories and work in progress are measured at the lower of cost or net realizable value. Valuation allowances for inventories and work in progress are calculated based on an analysis of foreseeable changes in demand, technology, or the market, in order to determine obsolete or excess inventories and work in progress The valuation allowances are accounted for in cost of sales or in restructuring costs, depending on the nature of the amounts concerned 31 December millions Valuation allowance for inventories and work in progress 654)(514)(378) contracts Impact of inventory and work in progress write downs on(285) (186 ircome (loss) before income tax related reduction of (77) ill and discontinued Note 19. Inventories and Work in Progress a Analysis of net value Raw materials and goods Work in progress excludi 649 564 onstruction c 958 204 inished goods Gross value (excluding construction contracts) Valuation allowance 2,614 355) (629) 2,196 Net value (excluding construction contrac Work in progress on construction contracts Valuation allowance 235 230 Work in Total, net progress on construction contracts, net 94 2,390 (b) Change in valuation allowance At 1 Januar (285 69 (Additions reversals 186) 38 Changes in consolidation grou Net effect of exchange rate changes and other changes t 31 Dmber Included in the amounts due from/to construction contracts Rounding differences may result in totals that are different from the sum