“Accounting and Analysis” – Our Sample Paper

Cash and Cash Equivalents

Cash and cash equivalents represent cash and short-term, highly liquid investments with maturities of three months or less at the date of purchase. The Company consider receivables from credit card companies to be cash equivalents, if expected to be received within five days.


Accounts Receivable

Accounts receivable are recorded at invoiced amounts, net of reserves and allowances, are not collateralized and do not bear interest. Allowance for doubtful accounts is based on a variety of factors, including the length of time receivables are past due, economic trends and conditions affecting their customer base, significant one-time events and historical non-collection experience. Specific provisions are recorded for individual receivables when they become aware of a customer’s inability to meet its financial obligations.

Inventory Valuation

Inventories are valued at the lower of cost or market. Inventory cost is determined using the moving average cost method. Inventory is at least revaluated annually for possible impairment using standard categories to classify inventory based on the degree to which product may need to be discounted below cost to sell within a reasonable period. Inventory fair value is based on several subjective assumptions including estimated future demand and market conditions, as well as other observable factors such as current sell-through of products, recent changes in demand for products, global and regional economic conditions, historical experience selling through liquidation and price discounted channels and the amount of inventory on hand. If the estimated inventory fair value is less than its carrying value, the carrying value is adjusted to market value and the resulting impairment charge is recorded in cost of sales on the consolidated statements of operations.

Property and Equipment

Depreciation of property, equipment, furniture and fixtures is computed using the straight-line method based on estimated useful lives ranging from two to five years. Leasehold improvements are amortized on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Depreciation of manufacturing assets such as molds and tooling is included in cost of sales on the consolidated statements of operations. Depreciation related to corporate, non-product and non-manufacturing assets is included in selling, general and administrative expenses on the consolidated statements of operations.

Impairment of Long-Lived Assets

Long-lived assets to be held and used are evaluated for impairment when events or circumstances indicate the carrying value of a long-lived asset may not be fully recoverable. Events that may indicate the impairment of a long-lived asset include;
A significant decrease in its market price,
• A significant adverse change in the extent or manner in which it is being used or physical condition
• A significant adverse change in legal factors or business climate that could affect value, including an adverse action or assessment by regulations
• An accumulation of costs significantly in excess of the amount originally expected for its acquisition or construction
• Its current period operating or cash flow losses combined with historical operating or cash flow losses or a forecast of its cash flows demonstrate continuing losses associated with its use
• A current expectation that, more likely than not, it will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. If such facts indicate a potential impairment of a long-lived asset (or asset group), it is assessed the recoverability by determining if its carrying value exceeds the sum of its projected undiscounted cash flows from its use and eventual disposition over its remaining economic life.
If the asset is not supported on an undiscounted cash flow basis, the amount of impairment is measured as the difference between its carrying value and its fair value. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell. Assets to be abandoned or from which no further benefit is expected are written down to zero at the time that the determination is made and the assets are removed entirely from service. An asset group is the lowest level of assets and liabilities for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For assets involved in our retail business our asset group is at the retail store level.

Intangible Assets

intangible asset class weighted average amortization period
patents 10 years
customer relationships estimated customer life
core technology 5 years
non-competition agreement contractual term
capitalized software shorter of 7 years or useful life

Impairment of Intangible Assets

Intangible assets with indefinite lives are evaluated for impairment when events or changes in circumstances indicate that the carrying value may not be fully recoverable and at least annually. Intangible assets that are determined to have definite lives are amortized over their useful lives and are evaluated for impairment only when events or circumstances indicate a carrying value may not be fully recoverable. Recoverability is based on the estimated future undiscounted cash flows of the asset. If the asset is not supported on an undiscounted cash flow basis, the amount of impairment is measured as the difference between its carrying value and its fair value.


Goodwill is considered an indefinite lived asset and therefore is not amortized. The Company assesses goodwill for impairment annually on the last day of the fourth quarter, or more frequently if events and circumstances indicate impairment may have occurred. If the carrying value of goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference.

Earnings per Share

Basic and diluted earnings (loss) per common share (“EPS”) is presented using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividend rights and participation rights in undistributed earnings. Under the two-class method, EPS is computed by dividing the sum of distributed and undistributed earnings (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. A participating security is an unvested share-based payment award containing non-forfeitable rights to dividends and must be included in the computation of earnings per share pursuant to the two-class method. Shares of the Company’s non-vested restricted stock awards are considered participating securities. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Anti-dilutive securities are excluded from diluted EPS.

Recognition of Revenues

Revenues are recognized when the customer takes title and assumes risk of loss, collection of related receivables is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Title passes on shipment or on receipt by the customer depending on the country in which the sale occurs and the agreement terms with the customer. Allowances for estimated returns and discounts are recognized when the related revenue is earned.
Shipping and Handling Costs and Fees
Shipping and handling costs are expensed as incurred and included in cost of sales. Shipping and handling fees billed to customers are included in revenues.
Share-based Compensation
The Company offers share-based compensation plans in which certain officers, employees and members of the Board of Directors are participants and may be granted stock options, restricted stock and stock performance awards. Awards granted under these plans are fair valued and amortized, net of estimated forfeitures, over the vesting period using the straight-line method. The fair value of stock options is calculated by using the Black Scholes option pricing model that requires estimates for expected volatility, expected dividends, the risk-free interest rate and the term of the option. If any of the assumptions used in the Black Scholes model or the anticipated number of shares to be awarded change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period. Share-based compensation expense associated with our manufacturing and retail employees is included in cost of sales in the consolidated statements of operations. Share-based compensation expense associated with selling, marketing and administrative employees is included selling, general and administrative expenses on the consolidated statements of operations.

Defined contribution plans

The Company has a 401(k) plan known as the Crocs, Inc. 401(k) Plan (the “Plan”). The Plan is available to employees on U.S. payroll and provides employees with tax deferred salary deductions and alternative investment options. The Plan does not provide employees with the option to invest in common stock. Employees may contribute up to 75.0% of their salary, subject to certain limitations. The company matches employees’ contributions to the Plan up to a maximum of 4.0% of eligible compensation.


Advertising costs are expensed as incurred and production costs are generally expensed when the advertising is run.
Research and Development
Research and development costs are expensed as incurred.
Foreign Currency Translation and Foreign Currency Transactions
Assets and liabilities of foreign operations denominated in local currencies are translated at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the weighted average rate of exchange during the applicable period. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in the foreign currency translation adjustment, a component of accumulated other comprehensive income in stockholders’ equity. Gains and losses generated by transactions denominated in currencies other than the local functional currencies are reflected in the consolidated statement of operations in the period in which they occur and are primarily associated with payables and receivables arising from intercompany transactions.

Derivative Foreign Currency Contracts

The company is directly and indirectly affected by fluctuations in foreign currency rates which may adversely impact our financial performance. To mitigate the potential impact of foreign currency exchange rate risk, the Company employs derivative financial instruments including forward contracts and option contracts. Forward contracts are agreements to buy or sell a quantity of a currency at a predetermined future date and at a predetermined rate. An option contract is an agreement that conveys the purchaser the right, but not the obligation, to buy or sell a quantity of a currency at a predetermined rate during a period or at a time in the future. These derivative financial instruments are viewed as risk management tools and are not used for trading or speculative purposes.

Income Taxes

Income taxes are accounted for using the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of other assets and liabilities. The Company provides for income taxes at the current and future enacted tax rates and laws applicable in each taxing jurisdiction. A two-step approach is used for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. Interest and penalties related are recognized to income tax matters in income tax expense in the consolidated statement of operations.
Taxes Assessed by Governmental Authorities
Taxes assessed by governmental authorities that are directly imposed on a revenue transaction, including value added tax, are recorded on a net basis and are therefore excluded from sales.
Accounting Adjustments as necessary
In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS).” This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. This changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. This pronouncement is effective for reporting periods beginning on or after December 15, 2011.
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.
In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment.” This pronouncement was issued to allow companies to assess qualitative factors to determine if it is more-likely-than- not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This pronouncement was effective for reporting periods beginning after December 15, 2011.
In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This pronouncement was issued due to Stakeholders raising concerns that the new presentation requirements about reclassifications of items out of accumulated other comprehensive income would be difficult for preparers and may add unnecessary complexity to financial statements and was issued with the intent for companies to defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments until the Board is able to reconsider certain paragraphs. This pronouncement was effective for reporting periods beginning after December 15, 2011.
In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” This pronouncement was issued to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This pronouncement is effective for reporting periods beginning after September 15, 2012.


Multiyear ROE Decomposition – Co. and Major Competitors


When decomposing ROE into the Du Pont equation we can better understand what are the real sources and causes of the increases/decreases of the ROE. In the case of Crocs, we can see that the ratios contributing the most to the changes in the ROE are the Net Profit Margin and Asset Turnover since the Equity Multiplier ratio, except for the 2005, has remained more or less in the same levels.

In the first 3 years analyzed for Crocs we can see that the company had increasing net profit margins year by year, however the other ratios Asset Turnover and Equity Multiplier were not performing well meaning that the company was not effectively using its assets and that it was losing its leveraged, reasons that probably, along with the financial crisis of 2007-2008, contributed with the ROE fall in the next years.

When comparing Crox with key competitors, we can see that even though during the first 3 years analyzed the ROE was above Nike and Sketchers in 2008 it fell even to negative levels and below its key competitors meaning that company was not able to maintain its good financial position for too much time. Is also important to say that Crocs key competitors were more financial solid during the world financial crisis of 2007-2008 since they had many less variations in the ROE and the other ratios evaluated.