Income Statements » What’s Behind Income Statements » Exercises
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E X E R C I S E S
is.wbn.is.je.060 Recording entries and determining financial-statement effects (Google)
Base your responses to parts (a)-(c) on the accounts on page 6; Google’s financial statements on pages 7-9; and the following excerpt from the Management Discussion and
Analysis of Financial Condition and Results of Operations section of Google’s 2011 10-K
(Page 35).
Charge Related to the Resolution of Department of Justice Investigation
In connection with a resolution of an investigation by the United States Department of
Justice into the use of Google advertising by certain advertisers, we accrued $500 million
during the three months ended March 31, 2011, which was paid in August 2011 upon
final resolution of that matter.
Required
(a) Using the accounts on page 6, record Google’s March 31, 2011 journal entry
to accrue the $500 million resolution of the investigation by the United States
Department of Justice.
Note: Four rows have been provided, but you may not need them all.
Debit
Credit
(b) Using the accounts on page 6, record Google’s August 2011 journal entry to pay
the $500 million resolution of the investigation by the United States Department of
Justice.
Note: Four rows have been provided, but you may not need them all.
Debit
Credit
(c) In this question, you are to consider the NET effect of the entries you recorded in
parts (a) and (b) on Google’s financial statements for the year ended December 31,
2011. Identify the line items that were directly affected (and the direction of the
effects). If the effect of one entry on a financial statement line item was offset by the
effect of the other entry, there is no net effect on the line item.
Guidance:
(1) Determine the appropriate line item(s) affected using Google’s statements. For
example, write “cash and cash equivalents” rather than “cash” because this is on
Google’s balance sheet.
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Record Keeping
This exercise helps
you learn how to
do record keeping
and reporting.
2
NAVIGATING ACCOUNTING®
(2) Include line item(s) directly affected, including the effect(s) of closing entries for events affecting income.
Ignore taxes.
(3) Don’t include totals or sub-totals indirectly affected by the entry. For example, don’t report “net
income” on the income statement. However, net income is NOT a total on the statement of shareholders’ equity.
(4) Three lines were included below for each statement, but you may need none or more than one line.
Write “NONE” if no line item is effected on the statement.
(5) Indicate if the effect(s) of the entries associated with the above event increased or decreased the line
item. Put an X in the appropriate column if the above event increases or decreases that line item. For
full credit, be sure to mark only one box in each statement’s row. NOTE: If a reported negative number
changes from -2 to -3, it decreases; if it changes from - 2 to - 1, it increases.
WARNING: Google reports the most recent year in the far right column.
Balance Sheets
Line Items
Statement of Shareholders' Equity
Increases
Decreases
Increases
Decreases
Line Items
Increases
Statement of Income
Line Items
Relevant information for parts (d) and (e)
Base your responses to parts (d) and (e) on Google’s financial statements in the supplement; the following excerpt
from Google’s Summary of Significant Accounting Policies footnote (Google’s 2011 10K, Page 57); definitions on
the next page; and the specific event description and assumptions described on the next page.
Summary of Significant Accounting Policies footnote excerpt
Cost of Revenues
Cost of revenues consists primarily of traffic acquisition costs. Traffic acquisition costs consist of amounts
ultimately paid to our Google Network members under AdSense arrangements and to certain other partners
(our distribution partners) who distribute our toolbar and other products (collectively referred to as access
points) or otherwise direct search queries to our website (collectively referred to as distribution arrangements).
These amounts are primarily based on the revenue share and fixed fee arrangements with our Google Network
Members and distribution partners.
Certain distribution arrangements require us to pay our partners based on a fee per access point delivered and
not exclusively—or at all—based on revenue share. These fees are non-refundable. Further, these arrangements
are terminable at will, although under the terms of certain contracts we or our distribution partners may be
subject to penalties in the event of early termination. We recognize fees under these arrangements over the estimated useful lives of the access points (approximately two years) to the extent we can reasonably estimate those
lives and they are longer than one year, or based on any contractual revenue share, if greater. Otherwise, the
fees are charged to expense as incurred. The estimated useful life of the access points is based on the historical
average period of time they generate traffic and revenues. Further, we review the access points for impairment
by distribution partner, type, and geography, and we have not made any impairment to date.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Decreases
3
EXERCISE
Prepaid revenue share and distribution fees are included in prepaid revenue share, expenses, and other assets on the
accompanying Consolidated Balance Sheets.
Definitions
Adsense
“Google AdSense refers to the online programs through which we distribute our advertisers’ AdWords ads
for display on our Google Network Members’ websites, as well as programs to deliver ads on television
broadcasts.” (page 56, Google’s 2011 10-K)
AdWords
“Google AdWords is our auction-based advertising program that enables advertisers to place text-based and
display ads on our websites and our Google Network Members’ websites.” (page 56, Google’s 2011 10-K)
Event Description and Assumptions for parts (d) and(e)
■ For the purpose of this question, assume Google continued a distribution arrangement with Apple during the year ended December 31, 2011 by paying Apple $1,000 million cash to have Google be the default
search engine in Apple’s Safari browser for the next two years (commencing on the payment date).
■ Assume for the purpose of this question that Google expects to recognize the $1,000 fee under this arrangement evenly over the two year contractual period.
■ Assume for the purpose of this question, when Google enters a multi-year contract, it records the benefits
expected to be received within one year in a different account than those expected to be received thereafter.
(d) Using the accounts on page 6, record Google’s journal entry for the $1,000 of cash paid to Apple to have
Google be the default search engine in Apple’s Safari browser for the next two years, as described above.
Note: Four rows have been provided, but you may not need them all.
Debit
Credit
(e) Identify the Google financial statement line items that would have been directly affected (and the direction of
the effects) if Google had recorded the journal entry in Part 4(a) for a $1,000 payment to Apple. Follow the
guidance given in part (c).
Balance Sheets
Line Items
Statement of Shareholders' Equity
Increases
Decreases
Increases
Decreases
Statement of Income
Line Items
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Line Items
Increases
Decreases
4
NAVIGATING ACCOUNTING®
Relevant information for parts (f) and (g)
Parts (d) and (e) center on a fictitious entry: while Google pays Apple to have Google be the default search engine
in Apple’s Safari browser, we fabricated the contractual terms for the purpose of this exam. In particular, we fabricated the numbers you recorded. By contrast, parts (f) and (g) center on one or more numbers actually reported
in Google’s 2011 10K. Here are specific facts and simplifying assumptions:
Excerpts from Google’s 2011 10K
Cost of revenues (Same as presented earlier, repeated here for your convenience):
Certain distribution arrangements require us to pay our partners based on a fee per access point delivered and
not exclusively—or at all—based on revenue share. These fees are non-refundable. Further, these arrangements are terminable at will, although under the terms of certain contracts we or our distribution partners
may be subject to penalties in the event of early termination. We recognize fees under these arrangements
over the estimated useful lives of the access points (approximately two years) to the extent we can reasonably
estimate those lives and they are longer than one year, or based on any contractual revenue share, if greater.
Otherwise, the fees are charged to expense as incurred. The estimated useful life of the access points is based
on the historical average period of time they generate traffic and revenues. Further, we review the access
points for impairment by distribution partner, type, and geography, and we have not made any impairment
to date. (Summary of Significant Accounting Policies footnote, page 57)
Traffic acquisition costs related to distribution arrangements included in Cost of revenues
For the year ended December 31, 2011, Google reports $1,517 million of Traffic acquisition costs related
to distribution arrangements are included in Cost of revenues. (Management Discussion and Analysis of
Financial Condition and Results of Operations section, page 33)
Simplifying assumptions
■ For all fees paid under distribution arrangements during the year ended December 31, 2011, Google concluded it could reliably recognize these fees over periods lasting more than one year.
■ Google recorded a single entry during the year ended December 31, 2011 to recognize traffic acquisition
costs related to distribution arrangements in Cost of revenues.
■ Google transfers non-current prepaid expenses to current prepaid expenses when the benefits are expected to be realized within one year and thus before these costs are expensed
(f) Using the accounts on page 6, record a journal entry that recognizes the $1,517 million of Traffic acquisition
costs related to distribution arrangements that Google included in Cost of revenues during the year ended
December 31, 2011, given the simplifying assumptions above.
Note: Four rows have been provided, but you may not need them all
Debit
Credit
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
5
EXERCISE
(g) Determine the direct effect(s) on the following Google metrics, everything else equal (ignore taxes) from the
entry you recorded in part(f).
Guidance
Include the direct affects, including the effect(s) of closing entries for events affecting income. Put an “X” in
the appropriate box.
Increases
Working capital (current assets - current liabilities)
Financial leverage (liabilities / assets)
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Decreases
No Effect
6
NAVIGATING ACCOUNTING®
Chart of Accounts
ASSETS
Current
AR
C
Einvc
Inv
OprEx
Ptacc
Accounts receivable
Cash
Equity and other investments: current
Inventories
Other prepaid expenses
Prepaid traffic acquisition: current
Noncurrent
Property, plant, and equipment
HcPPE PP&E historical cost
AcDep PP&E accumulated depreciation
Einvn Equity and other investments: non-current
Gdw
Goodwill
Ptacn Prepaid traffic acquisition: non-current
Tmks Trademarks, net
LIABILITIES
Current
Accm
AP
Drevc
DP
Oacl
STD
Accrued compensation and related expenses
Accounts payable
Deferred revenue: current
Dividends payable
Other accrued liabilities
Short-term debt
Noncurrent
Drevc Deferred revenue: non-current
LTD
Long-term debt
OLTL Other long-term liabilities
OWNERS' EQUITY
Permanent
AOCI
APIC
CS
NCI
RE
Accumulated other comprehensive income
Additional paid-in capital
Common stock
Noncontrolling interest
Retained earnings
Net income
Cost of revenues
TacEx
Ocrev
DepEx
Gppe
Ginvs
Gimp
IncS
Intinc
ResEx
Rev
SG&A
Traffic acquisition expense
Other cost of revenues
Depreciation expense
Gain on sale of PP&E
Gain on sale of investments
Goodwill impairment
Income summary
Interest income
Resolution of Department of Justice investigation expense
Revenues, net
Selling, general, and administrative expense
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
7
EXERCISE
Google Inc.
Consolidated Balance Sheets
$ in millions, except share and par value amounts, which are reflected
in thousands, and par value per share amounts
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Total cash, cash equivalents, and marketable securities (including
securities loaned of $4,031 and $2,778)
Accounts receivable, net of allowance of $101 and $133
Receivables under reverse repurchase agreements
Deferred income taxes, net
Prepaid revenue share, expenses and other assets
Total current assets
Prepaid revenue share, expenses and other assets, non-current
Deferred income taxes, net, non-current
Non-marketable equity securities
Property and equipment, net
Intangible assets, net
Goodwill
Total Assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Short-term debt
Accrued compensation and benefits
Accrued expenses and other current liabilities
Accrued revenue share
Securities lending payable
Deferred revenue
Income taxes payable, net
Total current liabilities
Long-Term Debt
Deferred revenue, non-current
Income taxes payable, non-current
Deferred income taxes, net, non-current
Other long-term liabilities
Commitments and contingencies
Stockholders' equity
Convertible preferred stock, $0.001 par value per share: 100,000 shares
authorized; no shares issued and outstanding
Class A and Class B common stock and additional paid-in capital, $0.00
par value per share; 9,000,000 shares authorized; 321,301 (Class A
250,413, Class B 70,888) and par value $321 (Class A $250, Class B
$71) and 324,895 (Class A 257,553, Class B 67,342) and par value $325
(Class A $258, Class B$67) shares issued and outstanding
Accumulated other comprehensive income
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
As of
December 31,
2011
As of
December 31,
2010
$13,630
21,345
$9,983
34,643
34,975
4,252
750
259
1,326
41,562
442
265
523
7,759
1,044
6,256
$57,851
44,626
5,427
745
215
1,745
52,758
499
0
790
9,603
1,578
7,346
$72,574
$483
3,465
1,410
961
885
2,361
394
37
9,996
0
35
1,200
0
379
$588
1,218
1,818
1,370
1,168
2,007
547
197
8,913
2,986
44
1,693
287
506
0
0
18,235
138
27,868
46,241
$57,851
20,264
276
37,605
58,145
$72,574
Google's 2011 10K, Page 51
8
NAVIGATING ACCOUNTING®
Google Inc.
Consolidated Statement of Income
Year ended December 31
$ in millions, except per share amounts
2009
2010
2011
$23,651
$29,321
$37,905
Cost of revenues (including stock based compensation expense of $47, $67, $249)
8,844
10,417
13,188
Research and development(including stock based compensation expense of $725, $861, $1,061)
2,843
3,762
5,162
Sales and marketing(including stock based compensation expense of $231, $261, $361)
1,984
2,799
4,589
General and administrative(including stock based compensation expense of $161, $187, $303)
1,668
1,962
2,724
0
0
500
15,339
18,940
26,163
8,312
10,381
11,742
69
415
584
Income before income taxes
8,381
10,796
12,326
Provision for income taxes
1,861
2,291
2,589
$6,520
$8,505
$9,737
$20.62
$26.69
$30.17
$ 20.41
$ 26.31
$ 29.76
Revenues
Costs and expenses:
Charge related to the resolution of Department of Justice investigation
Total costs and expenses
Income from operations
Interest and other income, net
Net income
Net income per share of Class A and Class B common stock:
Basic
Diluted
See accompanying notes
Google's 2011 10K, Page 52
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
9
EXERCISE
Google Inc.
Consolidated Statement of Shareholders' Equity
(In millions, except for share amounts which are reflected in thousands)
Class A and Class B
Common Stock and
Additional Paid-in Capital
Balances at January 1, 2009
Common stock issued
Stock-based compensation expense
Stock-based compensation tax benefits
Tax withholding related to vesting of restricted stock units
Net income
Other comprehensive loss
Balance December 31, 2009
Common stock issued
Common stock repurchased
Stock-based compensation expense
Stock-based compensation tax benefits
Tax withholding related to vesting of restricted stock units
Net income
Other comprehensive income
Balance December 31, 2010
Common stock issued
Stock-based compensation expense
Stock-based compensation tax benefits
Tax withholding related to vesting of restricted stock units
Net income
Other comprehensive income
Balance December 31, 2011
See Notes to Consolidated Financial Statements
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Shares
315,114
2,658
317,772
5,126
(1,597)
321,301
3,594
324,895
Amount
$14,450
350
1,164
60
(207)
0
0
15,817
1,412
(82)
1,376
72
(360)
0
0
18,235
621
1,974
60
(626)
0
0
$20,264
Accumulated
Other
Comprehensive
Income
$227
0
0
0
0
0
(122)
105
0
0
0
0
0
0
33
138
0
0
0
0
0
138
$276
Retained
Earnings
$13,562
0
0
0
0
6,520
0
20,082
0
(719)
0
0
0
8,505
0
27,868
0
0
0
0
9,737
0
$37,605
Total
Stockholders'
Equity
$28,239
350
1,164
60
(207)
6,520
(122)
36,004
1,412
(801)
1,376
72
(360)
8,505
33
46,241
621
1,974
60
(626)
9,737
138
$58,145
Best Buy's 2012 10K, Page 54