UCLA-NUS August 2019 MGMT 403: Financial Accounting Quiz 1 Solution

This document presents a comprehensive solution to the MGMT 403 Financial Accounting Quiz 1 from UCLA-NUS, focusing on the financial statements of Sirius XM Holdings Inc. The solution meticulously addresses questions related to the balance sheet, including accounts receivable, primary assets, liquidity, deferred charges, prepaid expenses, deferred revenue, and accrued interest, providing detailed calculations and explanations. Furthermore, the solution delves into the income statement, analyzing operating profit margin, depreciation and amortization, and dividends. The analysis provides insights into the company's financial performance and the implications of various accounting treatments, offering a thorough understanding of the financial accounting principles applied to the case study. The solution offers a detailed breakdown of the financial statements, addressing various aspects like the calculation of total amount owed by customers, the impact of transactions on financial statements, and the interpretation of key financial ratios. The solution explains the rationale behind capitalization of costs, the treatment of deferred revenue, and the implications of accrued interest. The income statement section analyzes operating profit margins, the recording of depreciation and amortization, and the impact of dividends. Overall, the solution provides a detailed examination of the financial statements of Sirius XM, enabling a comprehensive understanding of financial accounting concepts.

UCLA-NUS Name___________________
August 2019
MGMT 403: Financial Accounting
Quiz 1
Please refer to the financial statements of Sirius XM Holdings Inc. for 2016 in answering the following
questions. Show all computations in the space provided.
I. Balance Sheet (all dollar amounts in millions)
1. a. What is the total amount owed to Sirius by its
customers as of December 31, 2018? (3 points)
b. Suppose that in November 2018 Sirius sold $10
of its services to a car dealership on credit. Please
indicate the accounts and financial statements that
would have been affected by this transaction.
(You can show the journal entry if you’d like.) (3 points)
c. Suppose that in January 2019, Sirius collected
$4 of the amount sold in November 2018 (referred
to in b). How would this transaction affect the
items shown on the right for 2019? (3 points)
1. a. The total amount owed to Sirius by its customers
as of December 2018 is indicated in the balance sheet
as accounts receivable plus the allowance for doubtful
debt that the company made.
Thus, total amount owed = $233 million + $6.6
million = $239.60 million.
b. Accounts Financial Statements
Accounts Receivable Balance Sheet
Service Revenue Income Statement
The Journal entry for the same would be:
Accounts Receivable ----- Dr. $10
Service Revenue $10
c. Circle the correct response
(1) Revenues increase / decrease / no effect
(2) Accounts Receivable increase / decrease / no effect
(3) Current Ratio increase / decrease / no effect
2. a. What are the company’s two primary assets?
(2 points)
What percentage of total assets do they
collectively represent? (2 points)
b. How would investors likely view the company
because of the nature of these assets? (Discuss
both the positive and negative aspects.)
(3 points)
2.a. The two primary assets of the company are:
i. Intangible assets: $2,510.40
ii. Goodwill: $2,290
The percentage of these two collectively on total assets is
computed as: (2,510.40 + 2,290) / 8,172.70 = 4,800.40 /
8,172.70 = 58.74%
b. Positive: The investors would understand that the
company has good market reputation and created
goodwill for itself in the market. The market believes
in the potential of the company.
Negative: The investors would see that the company
do not have strong physical asset base which is an
indication of poor operating performance.

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3. a. Is the company liquid as of December 31,
2018? Explain. (3 points)
b. Considering the type of business that Sirius
is in (see its business model as summarized on
page 1 of the financial statements), why might
it not need to be as liquid (as indicated by
Balance Sheet measures) as some other types
of companies? (2 points)
3. a. To estimate the liquidity of the company, we would
compute its current ratio. The current ratio = Current
Assets / Current Liabilities = 478.2 / 2,802.70 = 0.17
times.
This is a very low current ratio and indicates that the
company is facing a liquidity crunch where it does not
have adequate current assets to discharge off its current
liabilities in time.
b. Sirius might not be that liquid as others as the
company works on a prepaid subscription model which
increases its current liability thereby reducing the
current ration and affecting the liquidity of the company.
4. a. Sirius reports a noncurrent asset,
Deferred charges - product development of
$292.7, as of December 31, 2018. What is the
justification for capitalizing these costs?
(2 points)
b. If the company’s management had decided
not to capitalize any of these costs and instead
recognized them as an expense when they
were incurred, how would the items to the
right have changed? (3 points)
4. a. The charges for product development, which has
been paid by the company, is capitalized as it is a form
of prepaid expenses and is an asset for the company.
The company has made cash payment for a service of
product that has not yet been received by it, thus this
payment is capitalized as an asset.
b. Circle the correct response
(1) Retained Earnings would have been:
higher / lower / the same
(2) Cash Flow from Investing Activities:
higher / lower / the same
(3) Prepaid Expenses would have been:
higher / lower / the same
5. Suppose that in early January 2019, the
company’s management discovers that the
Prepaid Expenses balance was overstated by
$20 because its accountants neglected to
record a rental expense for the month of
December 2018. How would this mistake
(before the correction) affect the items shown
on the right as of December 2018? (3 points)
5. Circle the correct response
After the correction:
(1) Net income would be:
higher / lower / the same
(2) The Cash balance would be:
higher / lower / the same
(3) Total Liabilities/Total Equity would be:
higher / lower / the same
6. a. Sirius reports Deferred Revenue in both
its current and long-term liabilities in the
amounts of $1931.6 and $149.0, respectively,
on December 31, 2018. What type of
transaction(s) gave rise to these amounts?
(3 points)
b. Why is Deferred Revenue a “nonmonetary”
liability? (2 points)
c. Suppose that the current portion of the
deferred revenue has a balance of $1,321.6
on January 31, 2019 as a result of only one
transaction. What was the nature of this
transaction? (3 points)
6. a. Transactions that involve collection of advance
payment from customers against services which have
not yet been rendered gives rise to Deferred revenue for
the firm. These are advance payments for services or
goods that have not yet been delivered or provided.
b. A deferred revenue involves collection of advance
payment for providing services in future. There is no
cash involved in providing services and thus it is a
nonmonetary liability. To satisfy its obligation, the
company should only perform the services promised
against which the payment has been received.
c. The current portion of the deferred revenue is towards
the prepaid subscription that has a service obligation of
less than one year i.e. annual or semi annual prepaid
subscription must have formed current portion of the
deferred revenue.
7. a. On December 31, 2018, Sirius reported
Accrued interest (within current liabilities)
7. a. This interest expense would form a part of the
income statement and must have been recorded as an

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II. Income Statement
10. a. A company’s operating profit margin is
often used to assess its performance. What was
Sirius’s operating profit margin in 2018?
(3 points)
b. Why might it make sense to focus on a
company’s operating profit margin rather than its
“bottom-line” net profit margin in evaluating its
profitability? (3 points)
10. a. The operating margin of the company is
computed as Income from operations / total revenues
generated by the company = 1,726.9 / 5,770.7 =
29.93%.
b. Every business has a core operation area where it
must excel in order to remain competitive in the
industry. The operating margin reflects the operating
efficiency of the company and this is important, as the
company should generate adequate funds from its core
operation. The net margin includes other items
including interest and taxes, which are a subset only
when the company generates, better operating margin.
It is the operating margin that reveals the actual
performance of the company.
11. a. Sirius recorded depreciation and
amortization of $300.7 for 2018. Why do
companies record depreciation and amortization?
(3 points)
b. How are the items listed on the right affected
by recording depreciation? (3 points)
11. a. Companies record depreciation and
amortization to provide for funds required for
replacement of fixed assets. The fixed assets of the
company suffer wear and tear with use and they must
be replaced after their useful life. The depreciation
account helps the company accumulate funds
required for this replacement.
b. Circle the correct response
(1) Earnings before interest & taxes:
increase /decrease /no effect
(2) Cash flow from operations:
increase /decrease /no effect
(3) PP&E as reported on the Balance Sheet:
increase /decrease /no effect
12. a. For 2018, Dividends declared per
common share is shown as $0.0451. Are
dividends declared an operating expense?
Explain. (2 points)
b. Show the calculation used to compute the total
amount of dividends paid out in 2018? (2 points)
12. a. No, the dividends declared are not an operating
expense. In fact the expenses towards dividend is a
bottom line expenses recorded after the net profit.
b. The amount of dividends paid by the company =
dividends paid per share * no. of shares
= $0.0451 * 4,461.8 million shares = $201.3 million
(as reported in the cash flow statement)
13. The company’s Net Income increased
significantly in 2018 by $528.0 from $647.9 to
$1,175.9. One analyst says that the main reason
for this increase is that the company managed to
control its Total Operating Expenses. Do you
agree with this? Why or why not? (3 points)
13. No, I do not agree with the statement of the
analysts. The income statement shows that the total
operating expense increased from 3,784.3 to 4,043.7
against the increase in revenue from $5,425.1 to
$5,770.7.
As a percentage the operating expense were 69.76%
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in 2017 and 70.07% of revenues in 2018. Thus, we
see that in reality the operating expenses have not
been controlled but in fact have increased as a
percentage of revenue generated.
The main contributing factor towards the increase in
net income is the decrease in tax expenses for the
company along with marginal decrease in interest
expenses and increase in other income.
14. a. What was the company’s book value at the
end of 2018? (2 points)
b. Explain what is meant by the “book value.”
(2 points)
14. a. The company’s book value at the end of 2018 is
computed as Total Stockholder’s Equity / total
number of common share outstanding.
Book Value = (1,816.9) / 4,345.6 = - 0.42
b. In literal sense, the book value means the value of
the business/asset or security as per the books of the
company. The book value is the total worth of the
company. The book value is the value that the
investor would receive in case the company is
liquidated.
Investors use the book value per share of the company
to determine its market position by comparing book
value to the market value.
15. a. Based on the 2018 reported earnings,
Sirius’s trailing twelve-month P/E ratio was 27. In
general, what does the P/E ratio indicate? (P/E ratio
= price per share / earnings per share) (2 points)
b. When the markets closed on December 31,
2018, the company’s stock price was $5.71. What
was its market cap? (2 points)
15. a. The P/E ratio indicates the estimated or
expected price of the share based on the earnings
generated by the company. The P/E ratio compares
the market price of the share based on the earnings
generated per share. This indicates the amount the
market is willing to pay based on the current
earnings of the company. A high P/E indicates
positive performance and market is ready to pay for
the shares.
b. The market cap = company’s stock price * no. of
shares = $5.71 per share * 4,461.8 million shares =
$25.48 billion.
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III. Cash Flow Statement
16. Cash flow from operations was $1,880.4
in 2018. In the same year, Net Income was
$1,175.9.
Describe four items that would cause Net
Income to differ from Cash flow from
operations. (4 points)
16. (1) Depreciation and amortization: This is reported
as an expense in the income statement but since it is a
non-cash expense, it is not reported in the cash flow
statement.
(2) Gain or loss on sale of assets: This is reported in the
income statement as income or loss, but reduced or
added back in the cash flow statement as it is a non-cash
component.
(3) Deferred revenues: This is not a part of the
net income as they have not yet been
earned, but since cash has been received
they are recorded in the cash flow
statement.
(4) Increase or decrease in working capital: the
changes in working capital items (accounts payable,
receivable, inventory, prepaid expenses etc.) are adjusted
in the cash flow statement but not a part of the income
statement.
17. a. What amount of cash was provided by
Depreciation and amortization in 2018? (2
points)
b. Under Cash Flows from Investing
Activities, Additions to property and
equipment is reported as (355.7). On the
Balance Sheet, Property and Equipment, net
increased by $50.1 from $1,462.8 to $1,512.9.
How would you explain the difference in the
amount shown on the Cash Flow Statement of
(355.7) and the increase reported on the
Balance Sheet of $50.1? (3 points)
c. How much cash was used to repurchase
common stock in 2018?
(2 points)
17. a. Depreciation and amortization is a noncash
expense for the company and do not involve any cash
outlay for the company.
b. In the cash flow statement, the addition to the
property in the current year is shown as a use of cash.
While in the balance sheet the amount shown is opening
value – accumulated depreciation for the year.
The difference in both these value is owing to the
depreciation that is not reported in the cash flow
statement, as it is a non-cash expense.
c. The total amount of cash used to repurchase common
stock in 2018 is $1,314.20 million
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18. Based on the information that
you considered in the prior
questions, provide an overall
summary of your “take” on Sirius
reflecting upon its performance,
financial position and outlook for
the future? (6 points)
18. In answering this question, comment on the company’s financial
position (based on information from the Balance Sheet), its
profitability (based on information from the Income Statement) and its
cash flows (based on information from the Cash Flow Statement).
($ in millions unless otherwise indicated)
At an overall level, we see that Sirius’s financial position has
dwindled as it moved from 2017 to 2018 where the total assets
and liabilities have reduced from $8,329.4 to $8,172.70 with
cash reducing from $69 to $54.
Upon reviewing the income statement we see that the
profitability of the company has deteriorated as evident from
decrease in %income from operations against revenue generated
from 30.04% in 2017 to 29% in 2018.
The cash flow statement also reveals that the company has used
up cash and ended with lower cash as compared to last year.
The company is not financially stable as evident from the
accumulated deficit and needs immediate influx of funds to
overcome the liquidity crunch reflected by a current ratio of only
0.17 times.
All in company needs to revamp its strategy and establish them
again by increasing their subscription and customer base leading
to inflow of money.
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