Chapter 12 Solutions 5th Edition - 112612 Final
Chapter 13
Chapter 12
Communication and Governance
Discussion Questions
1. Amazon’s inventory increased from $3.2 billion on December 31, 2010, to $5.0 billion one year later. In addition, sales for the fourth quarter of those years increased from $12.9 billion in 2010 to $17.4 billion in 2011. What is the implied annualized inventory turnover for Amazon for these years? What different interpretations about future performance could a financial analyst infer from this change? What information could Amazon’s management provide to investors to clarify the change in inventory turnover? What are the costs and benefits to Amazon from disclosing this information? What issues does this change raise for the auditor? What additional tests would you want to conduct as Amazon’s auditor?
Amazon had annualized sales of $51.6 billion and an implied annualized inventory turnover rate of 16.1 at the end of 2010 and $69.6 billion and 13.9, respectively, at the end of 2011.
Analysts could view this change in a positive manner if they anticipate that the increase in inventory is a signal that Amazon expects higher sales in the future. Once these higher sales are realized, the turnover rate will return to its prior level (unless the company anticipates continual sales increases, which certainly is a possibility with a company such as Amazon).
Analysts could also view this change in a negative way. While sales have increased, inventories have increased faster, suggesting that Amazon is not managing its inventories well. Because Amazon has more resources tied up in inventory, it will have to cut back on spending related to improving its operations and developing new products such as the Kindle series of e-readers.
To clarify the reasons for changes in inventory turnover, Amazon could provide information about:
• The types of products in inventory. Is the inventory mainly old products that have not sold and will have to be deeply discounted or written-off or is it new, popular
Chapter 12
Communication and Governance
Discussion Questions
1. Amazon’s inventory increased from $3.2 billion on December 31, 2010, to $5.0 billion one year later. In addition, sales for the fourth quarter of those years increased from $12.9 billion in 2010 to $17.4 billion in 2011. What is the implied annualized inventory turnover for Amazon for these years? What different interpretations about future performance could a financial analyst infer from this change? What information could Amazon’s management provide to investors to clarify the change in inventory turnover? What are the costs and benefits to Amazon from disclosing this information? What issues does this change raise for the auditor? What additional tests would you want to conduct as Amazon’s auditor?
Amazon had annualized sales of $51.6 billion and an implied annualized inventory turnover rate of 16.1 at the end of 2010 and $69.6 billion and 13.9, respectively, at the end of 2011.
Analysts could view this change in a positive manner if they anticipate that the increase in inventory is a signal that Amazon expects higher sales in the future. Once these higher sales are realized, the turnover rate will return to its prior level (unless the company anticipates continual sales increases, which certainly is a possibility with a company such as Amazon).
Analysts could also view this change in a negative way. While sales have increased, inventories have increased faster, suggesting that Amazon is not managing its inventories well. Because Amazon has more resources tied up in inventory, it will have to cut back on spending related to improving its operations and developing new products such as the Kindle series of e-readers.
To clarify the reasons for changes in inventory turnover, Amazon could provide information about:
• The types of products in inventory. Is the inventory mainly old products that have not sold and will have to be deeply discounted or written-off or is it new, popular