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Option A: WorldCom

Part I: Warm-up and General
a. Describe, in no more than two lines, WorldCom’s business. :
World com was the second largest long distance telecommunications company.
b. What was the percentage change in the Total revenues of WorldCom from 1999 to
2000? From 2000 to 2001? What were the corresponding changes in the Operating
Income? :
1999-2000 : Rev: $3,182M NI: $265M

2000-2001 : Rev: -3,911M NI: $-4,639

c. Which was higher, and by how much: WorldCom’s 2001 Net income or their 2001
Cash from operating activities. Is the result similar to previous years?
Cash from Operations was higher by $6,493M, yes the result is similar to previous
years
d. By how much (in dollars) did WorldCom’s Long-term debt increase during 2001?
How much of the change could be attributed to a change in Short-term debt and
current maturities?
LongTerm Debt increased by $12,249M, $7,028 could be attributed to changes in
shorterm debt and current maturities on long term debt
e. In 2001, was Comprehensive income higher or lower than Net income? By how
much? Which item explains the highest portion of the difference?
Comprehensive Income was higher by $2,561 with the biggest difference explained
by misc and other charges
f. Who would win if Australia played football against USA?
U.S. unless you remove the padding
g. When does WorldCom recognize Revenues from providing telecommunication
services? From installation fees?
We record revenues for telecommunications services at the time of customer usage.
Service activation and installation fees are amortized over the average customer
contract life.
Part II: Assets
h. When does WorldCom claim it expenses maintenance and repairs?
Maintenance and repairs are expensed as incurred
What was the increase in 2001 (relative to 2000) in the amount of capitalizing of
internal costs for construction of WorldCom’s own transmission systems?
$3,526

i. What were the cash expenditures for Property plant and equipment in 2001?
$7,886
Compare this amount to the 2000 expenditure. Which depreciation method is used
by WorldCom for financial reporting?
Accelerated depreciation method
j. When does WorldCom check for asset impairment? What is the test used for
impairment? What does the company do if an impairment exists?
We evaluate the recoverability of property and equipment when events and
circumstances indicate
that such assets might be impaired. We determine impairment by comparing the
undiscounted future
cash flows estimated to be generated by these assets to their respective carrying
amounts. In the event
an impairment exists, a loss is recognized based on the amount by which the
carrying value exceeds the
fair value of the asset. If quoted market prices for an asset are not available, fair
market value is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk
involved. Losses on property and equipment to be disposed of are determined in a
similar manner,
except that fair market values are reduced for the cost to dispose.
k. In conjunction with business combination during 2001. What was the fair value of
assets acquired? The net cash paid?
l. What percent of the existing gross Accounts receivable, WorldCom is not
expecting to collect? Ignoring the Deconsolidation of Embratel and the Additions
from Purchase Transactions, what was the bad debt expense and what were the
writeoffs for 2001?
11.7%, write-offs were 865M
Part III: Liabilities and Owner’s Equity
m. What was the rating of WorldCom’s senior debt, as of December 31, 2001, by
Standard & Poor’s?
BBB+
n. Assume the interest expense on the Income statement relates only to the Longterm debt and to half of the Short-term debt and current maturities (i.e., those were
paid, on average, in the middle of the year), as of January 1, 2001. What is the
average market effective rate for WorldCom’s debt?
o. Consider only Note 4 on page F-18. What is the amount recognized by WorldCom
as their Capital lease obligation? Assume payments of 30 on capital leases were
made on the last day of the year, the interest rate when the leases were initiated

was 10%, no lease was retired during the year and that all new leases were signed
on the last day of the year, with no related cash payments on that day. What was
the amount of new capital leases?
p. What were the rental expenses under Operating leases in 2000? In 2001? Why
did the expense increase in 2001?
q. Provide the journal entry that summarizes WorldCom’s Income tax expense for
2001. What was WorldCom’s Effective tax rate for the year? Which single item has
the largest impact on the difference between the statutory and the effective rate?
r. What would be WorldCom’s 2001 Basic EPS, had compensation costs for stock
option compensation plans been determined based on fair value at the grant dates?
What percent is this effect out of the Basic EPS? How does WorldCom calculate fair
value?
s. Who is the Weakest link?
George Castanza
t. Explain why (i.e., provide a relevant accounting concept) WorldCom records
pension costs that will be paid in the future, in its current financial statements. See
Note 11.
Part IV: Miscellaneous
u. Who is the auditor of WorldCom? What was the auditor’s opinion on WorldCom’s
Financial Statements as of December 31, 2001 and for the year ended December
31, 2001?
v. By how much will the adoption of SFAS 141 and 142 reduce annual amortization
expense of intangible assets? What is the range of impaired goodwill WorldCom
estimates it has?
w. A Judgment Question. After reading the WorldCom 2001 Annual Report, could you
anticipate the recent events? Why or why not? Are there any good hints in the
report? If yes, state it (Only a short answer is required here - up to 10 lines.)