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General Motors

1.Choose a public company (not a financial institution or utility).  The company must have issued bonds and have operating leases. Confirm your choice with your professor.  Obtain a copy of the most recent annual report or SEC filing that contains a complete set of financial statements and notes.
2.Prepare an analysis of the company’s accounting choices as described in the accounting policies note.  (Do not copy and paste from the financial statements into your report, you should only submit original work.)  Highlight the areas in which the company had a choice of accounting method and comment upon whether you think the choice is appropriate, given your company’s industry.  Explain how each choice affects the three primary financial statements (the balance sheet, income statement and statement of cash flows).  For example, is the choice one that would cause assets to be greater than if the company made an alternative choice? This summary should be about five pages long.
3.For each of the following prepare a table showing your calculations and provide a written explanation of your analysis and methodology.  Using the accounting equation framework, show the calculations for how each change affects the primary financial statements.  Then prepare a revised balance sheet and income statement in good form.
a.Identify Bad Debt Expense.  If your company disclosed bad debt expense, use that amount.  If your company does not disclose bad debt expense, assume that it is 5% of gross accounts receivables.  In either case, determine the effect on the financial statements of a 50% increase in bad debt expense.  
b.If your company used the LIFO method of accounting for inventory, use the required disclosures to compute what would happen if the company had used FIFO instead.  If the company used FIFO, make the assumption that the numbers are actually LIFO numbers and that the LIFO reserves at the beginning and end of the year were 30% of the reported inventory numbers. 
c.Compute the average useful life of your company’s long-lived assets.  Determine the effect if the average useful lives were 40% longer than what the company actually used.
d.Prepare a profile of the company’s debt.  How many bonds have been issued?  What are the coupon rates and effective (i.e., yield or market) rates?  Obtain a current market quote of the company’s two most recently issued bonds as of year-end and calculate the effect if the company repurchased those bonds at those prices on that date.  If you cannot determine the carrying value of these bonds, assume that they were issued at par.  Assume that to repurchase these bonds, the company issued bonds with a par value equal to the repurchase cost and that the new bonds carry a coupon rate of 4% with semiannual coupon payments and a 10-year maturity.  Assume the market rate at issuance is 4.5%.
e.Capitalize all operating leases using the market rate of interest from part d.
f.Assume that 60 days prior to the year-end, the company repurchased 500,000 shares of its common shares at the market price on that date.  Assume that 30 days prior to the year end, the company declared a 10% stock dividend.
g.Assume the company declares and pays a cash dividend equal to 10% of their net income.
h.Recalculate income tax expense using revised net income and the tax rate reflected on the original income statement and make any necessary accrual.
i.If the revisions that are made put the company in a negative cash position, assume that the company borrows enough cash to produce an ending cash balance of $1,000,000.  Assume that the borrowing took place at year end at a 6% interest rate and is to be paid back in six months.
4.Using your new balance sheet and income statement, prepare a revised statement of cash flows.

General Motors

The present study is based on an evaluation of accounting profile of General Motors by considering accounting standards and policies followed by them. The study will include areas in which company is having alternates for accounting method along with its viability and impact on financial statements. Further, revised financial statements will be prepared by considering the aspects provided in the assignment by making using framework of the accounting equation.

General Motors Company is also acknowledged as GM, an American international company. Its headquarters are situated in Detroit, Michigan, that produces, supplies, designs a wide range of vehicles and motor parts, it also vendors financial services. General Motors manufactures vehicles and motor parts among 37 countries in twelve brands.

Consolidated financial statements of General Motors has been prepared by considering US GAAP (generally accepted accounting principles in the United States of America).These financial statements are organised in agreement with US GAAP; it generally involves the utilisation of approximation, decisions, and supposition that influence the shown amount of assets and liabilities as well as the presentation of contingent assets and liabilities at the time of preparation of the financial statements (Pound, 2013). It will also affect the reported amounts of income and expenditure of income statement of the relevant accounting period.

Inventories are being settled at inferior costs or market value which is computed by reducing cost from selling price. It initially considers broad market and conditions of the economy, cyclic consideration of the existing effectiveness of vehicles and the outcome of existing offers of incentives at the date of balance sheet (Sy & Tinker, 2014). In an alternate to this company can value it at cost by ignoring market changes. However, this method is not viable as it does not the realisable value of cost. Further, it will reduce the accuracy of inventory in the balance sheet and gross profit in the income statement.

The Company considers the fair market value of its financial tools, mainly trade accounts receivable and trade accounts payable and cash and cash equivalents. it is also inclusive of the estimation of the reported values because of the  short-term period  of the interest rates, that are usually compared with the existing rate .The substitute of this contains conventional notable cost accounting, both the averaging and basing values are done  on contractual amounts (Pai & Tolleson, 2015). Conversely, the reality is not captured by fair value. There is a single thing captured by the historical cost that is about the financial instruments is an “accurate” but “meaningless” number. If this alternative complies that assets will be recorded at the historical amount, then in balance sheet without providing an effect to market changes.

No impairments were recognised for the years ended December 31, 2016, 2015 and 2014.In case, if assumptions show impairment in historical values then a number of assets will be shown at lowered amount by recording the loss in the income statement or amortising as per the case (Chuang & Chiang, 2016). During 2016 company implemented ASU 2015-17, "Balance Sheet Classification of Deferred Taxes”, which will result in efficiency for annual reporting stage at the beginning or later than December 15, 2016, with the prior implementation allowed. All of the overdue tax assets and liabilities must be categorised as noncurrent, as per the ASU 2015-17.

Analysis of the company’s accounting choices

In May 2014, ASU 2014-09 was issued by the FASB, "Revenue from Contracts with Customers" (ASU 2014-09) but the similarity is not implemented. ASU 2014-09, as altered is more effective for the company at the beginning of January 1, 2018. ASU 2014-09 will influence the rate and period of some income associated transactions principally resulting from the prior acknowledgement of certain incentives of sales. By considering this, recording of the sales incentives will be done during the period of sale instead of after sale or announcement. Company persist in considering the whole impact regarding the implementation of ASU 2014-09 on company's combined financial statements (GENERAL MOTORS STRATEGIC AND OPERATIONAL OVERVIEW, 2016). There is no expectation that the implementation of ASU 2014-09 to be material to our consolidated financial statements. The company is not even sure whether to adopt the provisions of ASU 2014-09 on a backward-looking basis or by increasing adjustments to equity.

In February 2016, FASB had issued ASU 2016-02 "Leases", by this the lessee is required to identify most leases on the balance sheet. Thus it will result in recognition assets and liabilities of lease mainly for the leases presently categorised as operating leases. ASU 2016-02 will result in efficiency at the beginning or after January 1, 2019, with the allowance of early adoption. Though the company is presently assessing the impact, the adoption will have on our consolidated financial statements (Lu, 2016). The company is expecting the key impact to their consolidated financial position leading adoption will be the recognition, on the basis of discount, of their least commitments under the operating non-cancellable leases on their consolidated balance sheets, therefore, resulting in the recording of the correct use of assets and lease responsibility (Maielli & Haslam, 2016). Company’s present minimum commitments under operating non-cancellable leases are revealed.

Part A

Particulars

Amount

Bad debt allowance

$303

Increase in bad debt expense

$151.50

Total bad debt

$454.50

Particulars

Amount

Inventories at LIFO

$13,788

ADD: Inventory LIFO reserve at end

$4,136.40

Less: Inventory LIFO reserve at beg

($4,129.20)

Inventories at FIFO (adjusted)

$13,795.20

Adjustments to current assets

Current assets as reported

$76,203

ADD: Inventory LIFO reserve

$4,136.40

Less: Inventory LIFO reserve at beg

($4,129.20)

Current assets adjusted

$76,210.20

In case if average useful lives of non-current assets were 40% longer than the amount of depreciation has been reduced, and the net value of total assets has been increased.

Effect of change in the useful life estimate is as follows:

Balance sheet: depreciation expense => => fixed asset book value

Income statement: depreciation expense => net income

Current depreciation of general motors is $10408. Let us assume estimated life is 10 years then the value of the asset will be ($10408*10) $104080. Now life is to be increased by 40% i.e. 14 years as per which depreciation will be ($104080/14) $7434. Difference amount i.e. $2973 will be added to the cost of the asset.

Particulars

Amount

Current depreciation of general motors

$10,408

Let us assume estimated life

10 years

value of asset will be

$104,080

life is to be increased by 40%

14 years

Depreciation (adjusted)

$7,434.29

Difference amount

$2,973.71

Particulars

Amount

Bonds issued

1500000

Coupon rate and effective rates

0.85%, 6.25%

Market Quote of Company bond

$1,000

Bond issued for repurchase

Issue price at par

$1,000

Bonds to be issued (Due amount/ issue price)

Total Amount

$48,000

Issuance cost

$2,160.0

Total value of issued bonds is $1500000 but due amount is $48,000 thus amount due amount is to be paid for repurchase. Thus new bonds will be issued at par at price of $1000.

Year

Payment ($millions)

PV @ 4.5%

2017

294

0.956938

281.3397

2018

280

0.91573

256.4044

2019

249

0.876297

218.1979

2020

196

0.838561

164.358

2021

166

0.802451

133.2069

Thereby

482

0.767896

627.6894

Add $627.68 million to the long term asset section of the balance sheet as “Assets Under Capitalized Leases”, and same amount will be added in liabilities side as “Capitalized Lease Obligations”.

Particulars

Amount

Shares to be purchased

500000

Price

$31.60

Amount

$15,800,000.00

Particulars

Amount

Revised income

$14,651

Dividend declared

$1,465.10

Particulars

Amount

Net income

$14,651

Income tax

$3,028.36

Net cash is positive thus this condition is not applicable to the given case scenario.

Particulars

Amount

cash and cash equivalent

 $    12,944.20

Marketable securiries

 $    11,841.00

Accouns and notes recievable

 $      9,486.50

GM financial recievables

 $    22,065.00

Inventories

 $    13,795.20

 Equipment on operating leases

 $      3,577.20

Other current assets

 $      4,015.00

Total current assets

 $    77,724.10

Non current assets

GM financial recievables

 $    20,724.00

Equity in net assets of nonconsolidated affiliates

 $      8,996.00

Property

 $    35,820.00

Goodwill and intangible assets

 $      6,259.00

GM financial equipment on operating leases

 $    34,526.00

Deffered income taxes

 $    35,029.00

Other assets

 $      4,070.00

Total non current assets

 $  148,460.71

Total assets

 $  226,184.81

Current liabilities

Accounts payable

 $    26,961.00

Short-term debt and current portion of long term debt

Automotive

 $      1,167.00

GM financials

 $    27,861.00

Accrued liabilities

 $    29,192.00

Total current liabilities

 $    85,181.00

Non current liabilities

Long term debt

Automotive

 $      9,585.00

GM financials

 $    46,015.00

Postretirement benefits other than pesnsions

 $      5,803.00

Pensions

 $    17,951.00

Other liabilities

 $    14,761.20

Total non current liabilities

 $    92,434.00

Total liabilities

 $  177,615.00

commitments and contingencies

Equity

Common stock

 $            15.00

Additional paid in capital

 $    29,367.20

Retained earnings

 $    29,012.14

Accumulated other comprehensive loss

 $    (9,330.00)

Total stockholders equity

 $    43,836.00

noncontrolling assets

 $          239.00

Total equity

 $    93,139.34

Total Liabilities and Equity

 $  226,184.81

Particulars

Amount

Net sales and revenue

Automotive

 $     156,849.00

GM finacial

 $         9,531.00

Total net sales and revenue

 $     166,380.00

Costs and expenses

 Automotive cost of sales

 $     132,348.10

Gmfinacial interest, operating and other expenses

 $         8,792.00

Automotive selling, general and administrative expense

 $       11,710.00

Goodwill impairment charges

Total costs and expenses

 $     152,850.10

Operating income

 $       13,529.90

Automotive interest expense

 $             572.00

Interest income and other non operating income

 $             429.00

Gain on extinguishment of debt

Equity income

 $         2,282.00

Income before income taxes

 $       15,668.90

Income tax expense

 $         3,238.76

Net income

 $       12,430.14

Net income loss attributable to non controlling interest

 $             159.00

Net income attributable to stockholders

 $       12,271.14

Net income attributable to common stockholders

 $       12,271.14

Particulars

Amount

Cash flow from operating activities

Net income

 $   12,271.14

Depreciation,amotization and impairment charges

 $      7,434.29

Foreign currency remeasuremnt and transaction losses

 $         358.00

Undistributed earnings of nonconsolidated affiliates

 $         (15.00)

Pension contributions and OPEB payments

 $   (3,465.00)

Pension and OPEB (income) expense

 $       (553.00)

Gains on extinguishment of debt

 -

Provision for deffered taxes

 $      1,886.00

Change in other operating assets and liabilities

 $       (438.00)

Other operating activities

 $       (904.00)

Net cash provided by operating activities

 $   16,574.42

Cash flow from investing activities

Expenditure for property

 $   (9,542.00)

Available for sale marketable securities, liquidations

 $ (15,182.00)

Trading marketable securities,liquidations

 $       (262.00)

Available for sale marketable securities, liquidations

 $   10,871.00

Trading marketable securities,liquidations

 $         872.00

Acquisition of companies/investments, net of cash required

 $       (809.00)

Purchases of financr recievables

 $ (17,869.00)

Principle collection and recoveries on finance recievables

 $   13,172.00

Purchases of leased vehicles

 $ (19,624.00)

Procceds from termination of leased vehicles

 $      2,557.00

Other investing activities

 $         173.00

Net cash used in investing activities

 $ (35,643.00)

Cash flow from financing activities

Net increase in short term debt

 $         798.00

Proceeds from issuance of debt

 $   45,141.00

Payment to purchase stock

 $   (2,515.80)

Payments on debt

 $ (23,815.00)

Dividends paid

 $       (902.90)

Other financing activities

 $       (117.00)

Net cash provided by financing activities

 $   18,588.30

effect of exchange rate changes on cash, cash equivalents and restricted cash

 $       (213.00)

Net decrease in cash, cash equivalents and restricted cash at beginning of period

 $   (2,172.00)

Cash and cash equivalents and restricted cash at end of period

 $   17,332.00

Conclusion

In accordance with the present study, the conclusion can be drawn that General Motors had prepared their accounting policies by considering all relevant accounting standards and associated amendments. Further, alternatives to the accounting policy do not result in the better presentation of accounting transactions. Revised financial statements have been prepared by considering accounting equation.

References

Chuang, C. H., & Chiang, C. Y. (2016). Dynamic and stochastic behavior of coefficient of demand uncertainty incorporated with EOQ variables: An application in finished-goods inventory from General Motors? dealerships. International Journal of Production Economics, 172, 95-109.

Lu, S. M. (2016). A review of high-efficiency motors: Specification, policy, and technology. Renewable and Sustainable Energy Reviews, 59, 1-12.

Maielli, G., & Haslam, C. (2016, December). General motors: A financialized account of corporate behaviour 1909–1940. In Accounting Forum (Vol. 40, No. 4, pp. 251-264). Elsevier.

Pai, K., & Tolleson, T. D. (2015). India's Satyam Scandal: Evidence the Too Large to Indict Mindset of Accounting Regulators Is a Global Phenomenon. Review of Business & Finance Studies, 6(2), 35.

Pound, A. (2013). The Turning Wheel-The story of General Motors through twenty-five years 1908-1933. Edizioni Savine.

Sy, A., & Tinker, T. (2014). The return of paper prophets a social critique of mainstream accounting: up-to-dated by Professor Sy. African Journal of Accounting, Auditing and Finance, 3(3), 171-178.

GENERAL MOTORS STRATEGIC AND OPERATIONAL OVERVIEW, (2016). [PDF]. Available through < https://www.gm.com/content/dam/gm/events/docs/5237319-645997-GeneralMotorsStrategicandOperationalOverview-9-21-2016 >. [Accessed on 14th July 2017].

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