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Revenue Recognition and Receivables

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Financial Statement Analysis

Part 1

Required: Refer to Eli Lilly's 2012 annual report to answer the following questions. The 2012 annual report of Eli Lilly & Company can be found here: http://www.sec.gov/Archives/edgar/data/59478/000005947813000007/lly-20121231x10k.htm
1. What is Eli Lilly's cash and cash equivalents balance at the end of 2012? Name two places you can find this information?
2. How does Eli Lilly define cash equivalents?
3. How much money is owed to Eli Lilly for goods and services at the end of 2012?
4. How much of the 2011 accounts receivable balance does the company expect to collect?
5. What is the percentage of "other receivables" to total current assets at the end of 2012? Round to the nearest whole percentage.
6. What is included in the "other receivables" balance?

Long-Term Note Receivable
Background: On January 1, 2011, Crabb & Co. sold land to Chiles, Inc. in exchange for a note with a maturity value of $500,000. The note is due December 31, 2013 and interest is owed each December 31 at a rate of 6%. Chiles' market rate of borrowing is 12%. Crabb originally purchased the land for $80,000 in 1978.

1. Was the note issued at a discount or a premium?

2. What is the fair market value of the land?

3. What is the gain or loss on the sale of the land?

4. How does this transaction affect the accounting equation of Crabb & Co.? ASSETS + LIABILITIES = EQUITY

5. What is the amount of interest income recognized by Crabb & Co. in 2012?

6. What is the amount of cash interest received by Crabb & Co. in 2012?

7. What is the carrying value of the note receivable on December 31, 2012?

Part 2

If a company recognizes revenue faster than justified, which of the following best describes whether A/R, inventory, and retained earnings are overstated or understated?

Accounts Receivable Inventory Retained Earnings
A. Overstated Overstated Overstated
B. Overstated Understated Overstated
C. Understated Overstated Overstated
D. Understated Understated Understated

Background: Many companies utilize a variety of different revenue recognition policies to accommodate the different types of revenue earned.

Define and describe each of the following revenue recognition methods. Be sure to indicate if/when each method is in accordance with generally accepted accounting principles.

1. Point of sale.
2. Completion-of-production.
3. Percentage-of-completion.
4. Installment sales.

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Solution Summary

This solution demonstrates how to calculate various pieces of financial information about a company and defines financial terms.

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