Week 2 FA Case

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1 Week 2 FA Case Caleb Cofer Dr. Patrick AC 740: Accounting Theory August 31, 2023

2 Ford Motor Company Part A Ford Motor Company uses both GAAP and non-GAAP principles for their financial and operational decision making and to assess their business performance. The non-GAAP measures that they use are intended as supplemental information to the equivalent GAAP measures which help to aid investors in better understanding their financial results. The most notable of these non-GAAP measures is their “company adjusted EBIT,” which focuses on underlying operational results and trends and improves internal comparability. It excludes special items such as pension remeasurement gains and losses, gains and losses on investments in equity securities, charges stemming from efforts to match production capacity and cost structure to market demand. I believe that these improve the quality of earnings by aligning their accounting income with its economic income, and by removing certain anomalies. Ford did make some changes to their accounting standards at the beginning of 2023 but claim that none of these changes had a material impact on their financial statements. Of these changes, the most significant is a requirement to provide disclosures in annual financial statements for transactions which were accounted for via a grant or contribution accounting model. I believe that this change contributed to greater transparency for transactions of this kind and therefore does not inflate earnings. I also do not see any evidence of the postponement of discretionary expenditures such as advertising in Ford’s financial statements. Although there are slight variances, this is typical of a country who spends billions of dollars on advertising every year.

3 Ford names a decrease in warranties as a driving factor of a higher EBIT in 2022, but also states that warranty expenses for the year are accrued based on the estimated costs of warranties based on the time of sale. Though this leaves some room for dishonesty and deferrals with these warranties, especially when they are stating this as a main factor in the improvement of their EBIT. I believe that this is something of note to pay attention to in the future. In relation to Ford’s inventory, sales, and loss contingencies, I do not see anything that would indicate that they don’t generate the necessary cash flow to replace their assets or that their receivables are increasing faster than their sales. After reviewing the management discussion and analysis section of Ford’s annual report, Ford is being affected by global current events such as COVID and the Ukrainian war. These issues are affecting consumer behavior, production, and suppliers. COVID has also had an indirect effect through pricing pressure and exchange rate volatility. Ford feels as though these current events have and will continue to cause some uncertainty in the markets but are not concerned about the long term. Instead, Ford plans to invest in certain contributions and structural costs to invest in future growth and revenue. Part B Ford has a strong correlation between their accounting and economic income but there are also some key differences to highlight. A large chunk of products are sold in full to dealerships and therefore the income is realized immediately. Although, there are some cases where vehicles can be bought and possibly financed directly from Ford. In these cases, the income would not be realized until later and therefore would only be available as accounting

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4 income, but not economic income. Ford also offers a wide array of warranties to their customers, which is accrued and recorded based on the historical information regarding the nature, frequency, and average cost of claims for each line of vehicle by year model. In addition, costs from recalls and other liabilities could be realized later and therefore not included in the economic income. Another huge driving factor of any differences that may exist between these two income reports is Ford Credit. Ford Credit is exactly what it sounds like – a system to let customers pay off their vehicle in multiple installments rather than in full or financing through a dealership or bank. Any sales through Ford Credit are obviously not realized immediately, and therefore would only be included in the economic income.

5 References Inline XBRL Viewer. (n.d.). https://www.sec.gov/ix?doc=%2FArchives%2Fedgar%2Fdata %2F37996%2F000003799623000012%2Ff- 20221231.htm#ie50adb6d899d4f6ebcb5e73f7bd915e7_16 Dan. (2013, July 23). Accounting income vs economic income . The Strategic CFO®. https://strategiccfo.com/articles/accounting/accounting-income-vs-economic-income/ #:~:text=Accounting%20Income%20vs%20Economic%20Income%20Definition,losses %2C%20whether%20realized%20or%20unrealized. Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Statement 1: The Income Statement. In Financial Accounting Theory and analysis text and cases . Wiley. Fernando, J. (n.d.). P/E ratio definition: Price-to-earnings ratio formula and examples . Investopedia. https://www.investopedia.com/terms/p/price-earningsratio.asp#:~:text=Key %20Takeaways-,The%20price%2Dto%2Dearnings%20(P%2FE)%20ratio,growth%20rates %20in%20the%20future. Top automakers by P/E ratio . CompaniesMarketCap.com - companies ranked by market capitalization. (n.d.). https://companiesmarketcap.com/automakers/automakers-ranked-by- pe-ratio/ Inline XBRL Viewer. (n.d.-a). https://www.sec.gov/ix?doc=%2FArchives%2Fedgar%2Fdata %2F1467858%2F000146785823000029%2Fgm- 20221231.htm#i54c9b176c0804fcabe51d5f8101e6190_187 Inline XBRL Viewer. (n.d.-a). https://www.sec.gov/ix?doc=%2FArchives%2Fedgar%2Fdata %2F1318605%2F000095017023001409%2Ftsla-20221231.htm#financial_statements