Chapter 12 Solutions 5th Edition - 112612 Final

Topics: Stock market, Public company, Initial public offering Pages: 11 (3811 words) Published: September 2, 2013
Chapter 13
Chapter 12
Communication and Governance
Discussion Questions
1.Amazon’s inventory increased from $3.2 billion on December 31, 2010, to $5.0 billion one year later. In addition, sales for the fourth quarter of those years increased from $12.9 billion in 2010 to $17.4 billion in 2011. What is the implied annualized inventory turnover for Amazon for these years? What different interpretations about future performance could a financial analyst infer from this change? What information could Amazon’s management provide to investors to clarify the change in inventory turnover? What are the costs and benefits to Amazon from disclosing this information? What issues does this change raise for the auditor? What additional tests would you want to conduct as Amazon’s auditor? Amazon had annualized sales of $51.6 billion and an implied annualized inventory turnover rate of 16.1 at the end of 2010 and $69.6 billion and 13.9, respectively, at the end of 2011. Analysts could view this change in a positive manner if they anticipate that the increase in inventory is a signal that Amazon expects higher sales in the future. Once these higher sales are realized, the turnover rate will return to its prior level (unless the company anticipates continual sales increases, which certainly is a possibility with a company such as Amazon). Analysts could also view this change in a negative way. While sales have increased, inventories have increased faster, suggesting that Amazon is not managing its inventories well. Because Amazon has more resources tied up in inventory, it will have to cut back on spending related to improving its operations and developing new products such as the Kindle series of e-readers. To clarify the reasons for changes in inventory turnover, Amazon could provide information about: •The types of products in inventory. Is the inventory mainly old products that have not sold and will have to be deeply discounted or written-off or is it new, popular products that have not yet been released to the public? •Forecasts of sales by product line.

Technical specifications, marketing strategies and release dates for new product introductions. •Changes in overall firm strategy that might be related to the increase in inventory. The costs of providing this type of additional information include: •Disclosure of proprietary information about the firm. Amazon’s competitors could use this information to adjust their business plans; •Loss of credibility if Amazon’s forecasts turn out to be incorrect. Investors and analysts will be more skeptical in the future; and •Potential legal liability if Amazon’s forecasts turn out to be incorrect and disgruntled shareholders sue. The benefits of providing this type of additional information include: •Provide analysts and investors with a better understanding of the firm’s plans; and •Added credibility for the firm in the future if the current forecasts and information turn out to be correct. The firm’s auditors would be interested in answering the same types of questions as outside analysts. They would be especially concerned about whether the slower turns are attributable to old obsolete inventory that may have to be written off. This will require tests that help clarify what type of inventory has increased, whether that inventory is for older lines or for new lines that are expected to be strong sellers next quarter/year. 2. a. What are likely to be the long-term critical success factors for the following types of firms? •a high-technology company, such as Microsoft

a large, low-cost retailer such as Wal-Mart
Critical success factors for a high-tech firm, such as Microsoft: •Investment in research and development of new technologies and applications; •Continual improvement of existing products to keep ahead of competitors; and •Large installed base of customers. Provides a ready market for compatible products and upgrades and makes it harder for competitors to build...
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