DECISION CASES – 2

DC-2
FINANCIAL REPORTING AND ANALYSIS
SAMRAT KANITKAR
FT222092
Decision Case 3-2
Reading and Interpreting General Mills’ Statement of Cashflows

Journal Entries
(in Millions)
Account Debit Credit

Purchases of Land, Buildings and Equipment $ 649.90

Cash $ 649.90

Payment of Long-term Debt $ 906.90

Cash $ 906.90
 Decision Case 3-3
Reading and Interpreting Carnival Corporation’s Balance Sheet

Real Time Journal Entry for

Effect on the Accounting Equation
Carnival Corporation
Account Debits Credits
Asset = Liability + Shareholders' Equity

Cash $ 1,000.00
Cash Customer Deposit
Customer Deposit $ 1,000.00

When customers wish to sail onboard a Carnival Cruise, they must book a berth
on a Cruise ship managed by Carnival Corporation. They therefore prepay for
their stay onboard, which includes all direct costs and expenses related to the
stay.
Due to this prepayment on part of the customers, Carnival Corporation must
incur a Customer Deposits Liability and must thereon gradually recognize the
liability as and when they provide services to the customers.
This is a case of Deferred Revenue.
When this revenue is recognized, adjusting journal entries are made in the form
of a separate account called Cruise Revenues which gets credited.
Also this is an External event that caused Carnival Corporation to incur the
Liability.

Reducing the Liability of Customer Deposits can be carried out by providing

Services to the Customers while they are sailing on the Cruise Ship and
subsequently recognizing the revenue for which the prepayment has already
been done by the Customers in the past.
Since providing services involves Carnival Corporation to making use of its own
assets (The cruise ship and the facilities available onboard), this is an Internal
Economic Event that enables Carnival Corporation to fulfill its obligations and
reduce its liabilities.
 Decision Case 4-2
Reading and Interpreting Nordstrom’s Notes-Revenue Recognition

1. As stated in the accompanying notes, Nordstrom recognizes revenue for the sales at the Retail Stores at the Point-of
Sale, that is, when the customer actually pays the cash at the cash counter of the Retail Stores. This indicates that the
Retail Stores use the Cash Basis of Accounting - The revenue from sales is recognized at the time of actual payment of
cash.
On the other hand, when merchandise is shipped to the customers directly from the stores, catalogs and online sales,
the Revenue from such sales is recognized by Nordstrom when its estimates suggest that the Customer is in receipt of
the merchandise. These estimates are based on historical patterns. Thhis indicates that the revenue recognition from
shipping Merchandise follows an Accrual Basis of Accounting - The revenue is recognized at a time other than when the
actual cash is paid.
Finalizing the basis of Accounting to be used is a Business dependent decision. Retail stores may get familiar as well
as unknown customers and hence, recognizing revenue is kind of necessary at the exact time when the cash is in hand
after the transaction is completed at the cash counter. On the other hand, when shipping merchandise to the customer,
Nordstrom records a liability (Deferred Revenue) on its part and only earns and realizes the revenue, when it is sure that
the customer would receive the merchandise and the obligation can be fulfilled. This, as mentioned in the note, it does
based on Historical return patterns of the customers under consideration.

2. Journal Entry by Nordstrom at the time of Gift

Card Purchase
Account Debit Credit
2. Revenue associated with gift cards is recognised by
NordStrom in two ways:
Cash xxx
a. When the customer redeems the Gift Card, revenue is deemed
Gift Card Liability xxx
to be recognised
2. Journal Entry by Nordstrom when the card has
b. Based on historical data, if it is highly likely that the customer
been Redeemed
will not redeem the card, Breakage Income is deemed to be
Account Debit Credit
recognized

Gift Card Liability xxx

Service Revenue xxx
Decision Case 5-3
Reading and Interpreting GAP Inc.’s Inventory Note

1. The Inventory Costing Method used by GAP Inc., as stated in

the accompanying note for Merchandise Inventory, is the
Weighted Average method.
The Weighted Average Method has the biggest advantage of
being the simplest method of Inventory Costing and always
provides a value midway between the values provided by the
LIFO and FIFO methods.
Also, GAP Inc. is an Apparel Merchandise company and could
be using the weighted average method for Inventory costing
because many times, the inventory is pretty inter-twined
(especially with identical items) and assigning a specific cost to a
specific item becomes very cumbersome.

2. GAP Inc. defines Market as the Replacement Cost.

The company tracks all the slow moving merchandise and
Broken Assortments and compares their original cost with the
prevailing value for replacement in the market. If the
replacement cost is lower than the original cost, then the
comany writes down the Inventory at the Replacement cost.
This is carried out to see that Gross Profit Percentage remains
maintained. It also helps GAP Inc. to clear its merchandise.