University of Arizona Accounting 554 Case #1: Dow Chemical Company Goals: • • • Become familiar with a set of financial statements including auditor opinion and significant accounting policy footnote, Perform basic analysis and interpretation of the financial statements, including common size analysis, Recognize the role of estimates in the measurement of financial statement amounts.
Refer to the Dow Chemical financial statements for 2008 in answering the following: 1. Who are Dow’s external auditors? Describe the two opinion letters that Dow received for 2008. In your own words, explain what these opinions mean. Why are the opinions dated several weeks after Dow’s year end? 2. Use a spreadsheet to construct common-size income statements for 2008 and 2007. (Note: common-size income statements are constructed by dividing each income statement item by net sales). a. Was the company profitable during 2008? During 2007? What does the term “profitable” mean? b. Compute the percentage change in net sales and in net income from 2007 to 2008. c. What are Dow’s major categories of expenses? Do you detect any significant changes in the structure of costs in 2008 compared to 2007? d. Dow shows separate lines on the income statement for goodwill impairment losses, restructuring charges, purchased in-process research and development charges, acquisition-related expenses and asbestos-related credits. Why do you think the company chose not to just include all of the amounts within the line item for “Selling, general and administrative expenses.” e. How would the percentages you computed in part 2b change if the items in part 2d were excluded in measuring net income. (Caution: the items listed in part 2d are shown before tax, while net income is shown after tax. Be sure to adjust your answer accordingly, using the statutory tax rate of 35%.) f. In a single sentence, explain why Dow’s profitability changed from 2007 to 2008. 3. Refer to the statement of cash flows. a. Compare Dow’s net income to cash provided by operations. Why is there such a big difference? b. Explain why (i) depreciation and (ii) restructuring charges are shown as positive additions to cash provided by operations. c. Based on reading the statement of cash flows, explain in a short paragraph where Dow got cash in 2008 and what happened to that cash. 4. Several sections in Note A to the Dow financial statements refer to estimates (either using the word “estimate” or otherwise). Make a list of accounting estimates mentioned in Note A. Which of these estimates do you think is most critical in measuring Dow’s income?
The Dow Chemical Company and Subsidiaries PART II, Item 8. Financial Statements and Supplementary Data. Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of The Dow Chemical Company: We have audited the accompanying consolidated balance sheets of The Dow Chemical Company and subsidiaries (the "Company") as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders' equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15 (a) 2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and...
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