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BUAD 5107: Module 7
Graded Module Submission (90 points)
This final Module Submission is more comprehensive than previous Module Submissions. Given the
nature of the material for this module, there is no Pacing Exam for this final module. This helps to
alance out the work load.
Part XXXXXXXXXXpoints)
A common agency problem with standards is the challenge of monitoring behavior to address the
consequences associated with under-performing. However, the opposite behavior of “over-
performing” should also be anticipated when standards are employed in a professional setting. For
example, assume a new staff member in a professional services firm is given a job to complete; and
the new staff member is told that the standard time expected for the work based on the experience of
previous years is 15 hours. In this example, let’s say the new staff member spent a total of 21 hours
to complete the work. Knowing the standard time is 15 hours, this staff member might decide to
emain after hours in the workplace to work hours that will not be recorded when the staff member
accounts for the time worked. In this example, when 21 hours were spent by the staff member to
complete the job, assume the new staff member decided to work 6 six hours “off the clock” (i.e., six
hours is the amount of personal “after-hours time” the employee spent doing the work and only 15
hours of work during regular office hours were actually recorded as part of the staff member’s time
log).
1.1 (6 points) What are the likely motivations for the new staff member to work 6 hours off-the-clock
and not account for this time?
1.2 (8 points) Since the professional services firm is gaining performance rather than losing time,
what are the important reasons for the firm to be concerned about this practice?
Part XXXXXXXXXXpoints)
The emergence of global capital markets has created the demand for harmonization of financial
eporting standards.
2.1 (6 points) Explain the difference between “adoption” and “convergence.”
2.2 (6 points) Explain why it is highly unlikely from a political perspective that the United States will
“adopt” International Financial Reporting Standards.
Part XXXXXXXXXXpoints)
Introduction
This problem is based on Netflix Inc. and it is designed to underscore the power of financial ratios and
the relationship between “numbers and strategy.” Whether we are making a personal plan for
etirement or we are leading an organization, when making decisions that involve financial resources
and strategies, ratios are an important because they highlight relationships.
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BUAD 5107: Module 7
In the introductory paragraphs of their SEC Form 10-K, prepared for the 2018 fiscal year, Netflix
describes their company as “… the world’s leading internet entertainment service with over 139
million paid memberships in over 190 countries enjoying TV series, documentaries and feature films
across a wide variety of genres and languages.” (Netflix Inc., 2018) Numbers are an essential part of
the Netflix story.
Netflix was founded in 1997 on a business model that employed the then “new idea” of placing videos
in mailers and mailing them to subscribers in return for small rents. Subscribers would take the videos
out of the mailers, watch them on their players at home, and send them back to Netflix. The company
has come a long way since 1997. Netflix is an outstanding example of a company that has
continuously “reinvented itself” in response to challenges emanating from a rapidly changing
environment. Still, their future success is in no way guaranteed. The excerpt which follows is taken
from the XXXXXXXXXXK report Netflix filed with the SEC.
We are a pioneer in the internet delivery of TV shows and movies, launching our streaming
service in 2007. Since this launch, we have developed an ecosystem for internet-connected
screens and have added increasing amounts of content that enable consumers to enjoy TV
shows and movies directly on their internet-connected screens. As a result of these efforts, we
have experienced growing consumer acceptance of, and interest in, the delivery of TV shows
and movies directly over the internet.
Our core strategy is to grow our streaming membership business globally within the parameters
of our profit margin targets. We are continuously improving our members' experience by
expanding our streaming content with a focus on a programming mix of content that delights our
members. In addition, we are continuously enhancing our user interface and extending our
streaming service to more internet-connected screens. Our members can download a selection
of titles for offline viewing. (Netflix Inc., 2018)
Netflix has em
aced the concept of providing original programming. Their programs and
documentaries have been honored with Emmy, Golden Globe, and Academy Oscar awards.
Required
An Excel spreadsheet file containing 5 worksheets accompanies this text and will be referenced in the
emainder of this Module Submission. The Excel file contains financial data relevant to the questions
that follow. The purpose in providing the Excel file is to eliminate the added time it would take to
compile financial data from the SEC filings and enter numbers into a calculating program. This Excel
file greatly simplifies the process and focuses your limited time to the best advantage. You can use
the Excel spreadsheet to make calculations – the spreadsheets are for your use and should not be
submitted. Using the data provided in the Excel File, respond to the questions which follow.
You must use the data provided in the Excel file and your response to each question should
e entered into this document following after each question -- DO NOT submit a spreadsheet
file or any other additional files, only submit one document.
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BUAD 5107: Module 7
Liquidity Metrics
3.1. Managing liquidity is a challenge faced by individuals and organizations alike. In the case of a
shutdown by the Federal government, employees who do not receive their regular paychecks are
acutely aware of the potential for a liquidity crisis in their household. The business strategy em
aced
y Netflix is a high-risk strategy which also underscores the importance of managing liquidity. You
can think of the cu
ent ratio as a “financial vital sign” co
esponding to pulse or blood pressure in the
domain of “medical vital signs.”
3.1.A (2 points) Compute the cu
ent ratio for Netflix as of December 31, 2018, December 31, 2017,
December 31, 2016. Note: Do NOT include “Defe
ed revenue” in the computation of this ratio. Round
to 2 decimal places.
Answers: December 31, 2018 _______; December 31, 2017 _______; December 31, 2016 _______
3.1.B (2 points) Is there a trend in Netflix’s cu
ent ratio over the three-year period under
consideration and, if so, does the trend indicate that Netflix’s short-term liquidity position has
significantly improved or deteriorated? Explain.
Operating/Profitability Metrics
3.2 Over the three-year time period covering fiscal years 2018, 2017, and 2016, the amount Netflix
spent on marketing more than doubled. During this same time period revenues also increased
dramatically.
3.2.A. (4 points) Expressed as a percentage of sales revenue, by what percent has the amount spent
on marketing increased or (decreased) when the ratio for the fiscal year ended 12/31/16 is compared
to the ratio for the fiscal year ended 12/31/18? Round to 2 decimal places.
Answer _________%
3.2.B (4 points) Marketing appears to be a crucial part of Netflix’s operating strategy and their cost
structure. Without a major commitment to marketing it appears that Netflix could not achieve its goal
of increasing revenue from subscriptions. If they could, we can assume that Netflix would cut back on
marketing and devote those funds to other purposes. Explain how the relationship between revenue
and marketing expense creates a cost structure that results in a ba
ier to entry that would discourage
or prevent existing and potential competitors from attempting to compete with Netflix for market
share.
3.3 Netflix uses the term “content” which roughly co
esponds to “inventory” and the term “cost of
evenue” which roughly co
esponds to “cost of goods sold.” The “inventory” that Netflix streams
includes previously canceled series from other networks, licensed and co-produced content, and
Netflix original content. Content assets are intangible property rights. Our course has considered the
importance of managing costs and cost accounting—these topics are of crucial importance to Netflix
now that they have made the decision to produce their own original content.
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BUAD 5107: Module 7
3.3.A. (4 points) The ratio of cost-of-revenue to revenue (cost-of-revenue
evenue) provides a metric
to assess how well Netflix is able to manage its gross profit percentage. An increase in rates charged
to customers and/or a decrease in the cost of revenue will result in an increase in the gross profit
percentage. If the ratio of “cost-of-revenue to revenue” reported for the year ended December 31,
2016 did not change over the three-year period from the number computed for the year ended
December 31, 2016, how much in thousands of dollars would operating income for the year ended
December 31, 2018 have increased or (decreased)?
Answer $_____________________ indicate whether the change is an increase or decrease
3.3.B (4 points) Rather than making a tangible product, such as furniture or widgets, Netflix makes
content for streaming. When accounting for the cost of original content, Netflix will account for the
direct materials, direct labor, and overhead expended to create the content. Producing content
equires production assets, licenses, and an investment in technology. Explain how accounting
choices regarding methods of depreciation and amortizations can influence the determination of the
amounts reported as “cost-of-revenue.”
Capitalization Metrics
3.4 Many individuals have chosen to purchase their homes rather than rent, and many of these
owners depend upon mortgages as a source of long-term financing. During the housing crisis
eginning in 2008, homeowners who bought with minimal down payments and homeowners who
o
owed extensively against their home’s appreciation found themselves in a highly leveraged
position when the housing crisis struck. These decisions made by homeowners’ parallel decisions
made by Netflix executives.
3.4.A (4 points) As reported on December 31, 2018, December 31, 2017, and December