Amazon.com, Inc. is the world’s leading Internet retailer of merchandise and media. Amazon also designs and sells electronic products

Amazon.com, Inc. is the world’s leading Internet retailer of merchandise and media. Amazon also designs and sells electronic products, such as e-readers. Netflix, Inc.isthe world’sleading Internet television network. Both companies competeinthe digital media and streaming space. However, Netflix is more narrowly focused in the digital streaming business than is Amazon. Sales and average book value of fixed assets information (in millions) are provided for Amazon and Netflix for a recent year as follows:

                                                      Amazon | Netflix

Sales                                           $107,006 | $6,780

Average book value of fixed assets 19,403 |    162

a. Compute the fixed asset turnover ratio for each company. Round to one decimal place.

b. Which company is more efficient in generating sales from fixed assets?

c.  Interpret your results.

Answer:

a.

$107,006

$19,403

$6,780

$162

5.5

41.9

b. Netflix is more efficient than Amazon in generating revenue from fixed assets.

Netflix’s fixed asset turnover ratio is 41.9, which means it is able to generate $41.90 

of revenue for every dollar of fixed assets. Amazon’s fixed asset turnover ratio is 5.5, 

which is only $5.50 of revenue for every dollar of fixed assets. Netflix’s fixed asset 

turnover ratio is more than 7 times larger than Amazon’s (41.9 ÷ 5.5).

c. The difference in their fixed asset turnover ratios reflects the difference in their

core businesses. Netflix is mostly an Internet streaming and DVD rental company.

These services do not require significant fixed assets. The most significant fixed

assets of Netflix are its information technology assets, followed by its headquarters 

and DVD mailing operations. Amazon also provides streaming services, media 

downloads, and other electronic products. In addition, Amazon sells a wide 

assortment of merchandise and markets Kindle

®

 products. This broader

assortment of activities requires more extensive use of fixed assets beyond

information technology, including warehouses and equipment. These additional

fixed assets are the cause of Amazon’s lower fixed asset turnover ratio.  

Mattel, Inc., designs, manufactures, and markets toy products worldwide. Mattel’s toys include Barbie® fashion dolls and accessories, Hot Wheels®, and Fisher-Price brands

Mattel, Inc., designs, manufactures, and markets toy products worldwide. Mattel’s toys include Barbie® fashion dolls and accessories, Hot Wheels®, and Fisher-Price brands. For a recent year, Mattel reported the following net cash flows from operating activities (in thousands):

First quarter ending March 31 $  (53,110)

Second quarter ending June 30 (187,663)

Third quarter ending September 3018,435

Fourth quarter ending December 31956,895

Explain why Mattel reported negative net cash flows from operating activities during the first and second quarters and a large positive cash flow for the fourth quarter, with overall net positive cash flow for the year.

Answer:

Toy manufacturers and retailers experience a seasonal trend in cash flows from operating activities. Mattel, Inc., experiences negative cash flows during the periods when merchandise is ordered and produced for the holiday season. Mattel, Inc., generates large positive cash flows during the holiday season, November–December. As a result, Mattel, Inc., reports overall positive net cash flows from operating activities for the year.

A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear for Pierre Cardin and Victoria Jones

A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear for Pierre Cardin and Victoria Jones, pleaded guilty to financial statement fraud. These managers used false journal entries to record fictitious sales, hid inventory in public warehouses so that it could be recorded as “sold,” and required sales orders to be backdated so that the sale could be moved to an earlier period. The combined effect of these actions caused $25 million out of $40 million in quarterly sales to be phony.

a.  Why might control procedures listed in this chapter be insufficient in stopping this type of fraud?

b.  How could this type of fraud be stopped?

Answer:

a. The most difficult frauds to detect are those that involve the senior managers of a company who are in a conspiracy to commit the fraud. The senior managers have the power to access many parts of the accounting system, while the normal separation of duties is subverted by involving many people in the fraud. In addition, the authorization control is subverted because most of the authorization power resides in senior management.

b. Overall, this type of fraud can be stopped if there is a strong oversight of senior management, such as an audit committee of the board of directors. Individual whistle-blowers in the company can make their concerns known to the independent or internal auditors who, in turn, can inform the audit committee. The audit committee should be independent of management and have the power to monitor the actions of management.

Twenty-First Century Fox, Inc. is one of the world’s largest entertainment companies that includes Twentieth Century Fox films

Twenty-First Century Fox, Inc. is one of the world’s largest entertainment companies that includes Twentieth Century Fox films, Fox Broadcasting, Fox News, the FX, and various satellite properties. The company provided revenue disclosures by its major product segments in the notes to its financial statements as follows:

Major Product Segments For a Recent Year (in millions) Cable Network Programming$13,773 Television4,895 Filmed Entertainment9,525 Direct Broadcast Satellite Television 2,112 Total revenues of major segments $30,305

a. Provide a vertical analysis of the product segment revenue. Round whole percents to one decimal place.

b. Are the revenues of Twenty-First Century Fox, Inc. diversified or concentrated within a product segment? Explain.

Answer:

a.

Twenty-First Century Fox, Inc.

Major Product Segments

Cable Network Programming $13,773 45.4%

Television4,895 16.2%

Filmed Entertainment9,525 31.4%

Direct Broadcast Satellite Television 2,112 7.0%

Total revenues$30,305 100.0%

b. Twenty-First Century Fox, Inc. is moderately diversified. The Cable Network 

Programming segment has the largest percent of revenues to total revenues at 

45.4%. This segment represents almost half the revenues of the company. 

However, Television and Filmed Entertainment have a percent of revenues to  

total revenues of over 16% and 31%, respectively. Thus, these are significant 

segments suggesting a degree of diversification when all three are considered 

together.

The Direct Broadcast Satellite Television segment is the smallest segment with 

revenues equal to 7% of total revenues and thus provides some minor additional

diversification.