Accounting Waiver Examination
Sample Questions and Solutions
This document contains two exams that cover different topics. The actual waiver
exam is just one exam that covers both sets of topics. There will be only one set
of financial statement excerpts to which the waiver exam questions will refer.
For each sample exam, there are three sets of material: the questions, the
financial statement excerpts that are relevant, and the solutions.
1
Name
ACCOUNTING 6130
Sample Midterm Exam
Instructions:
• Please print your name in the space provided above
• The exam is open-book, open-notes; electronic devices are allowed.
• The exam is to be done individually!
Question Points Possible Points Scored
Question I (Mechanics) 31
Question II (Miscellaneous) 20
Question III (Revenue Recognition) 21
Question IV (FS Analysis) 17
Question V (Cash Flow) 17
Total . 106
2
Question I: (31 points) Journal Entries
Give me the Journal Entries for each of the following transactions / events.
Answer each of these independently
1. (3 pts) A firm borrows $10,000 in cash in the form of a long-term note.
2. (3 pts) A firm buys Inventory on Credit for $20,000.
3. (3 pts) A firm records $30,000 of Depreciation Expense.
4. (4 pts) Employees earn $40,000 in wages this year. Of this amount, $35,000 was paid in
cash and the remainder will be paid next year.
3
5. (8 pts) A firm sells Inventory that originally cost them $60,000. The inventory had been
purchased and paid for last year. The firm receives $25,000 in Cash and also receives a
Receivable in the amount of $40,000.
• What are the journal entries this year?
• How does the above transaction show up on the cash flow statement? (Give me the effect
on income and the applicable adjusting entries, if any)
6. (10 pts) A firm sells land that it had purchased many years ago for $100,000. It receives
shares of stock (from the selling company) valued at $900,000. The firm’s main business
does not involve buying and selling land.
• What are the journal entries?
• Are any adjusting entries required on the cash flow statement? Explain.
• Is a footnote to the cash flow statement required related to this transaction? Explain.
4
Question II (20 points) Miscellaneous
Answer each of the following independently
1. (4 pts) Suppose the Beginning Balance of Inventory was $100,000. The firm purchased
$20,000 of inventory for cash and $30,000 of inventory on credit that it has not yet paid.
Ending Inventory was $40,000.
How much was the Cost of Goods Sold?
2. (8 pts) Suppose that Retained Earnings was $150,000 at the beginning of the year. During
the year, we did the following (all of this has already been entered into the accounts, and the
closing entries have taken place): Some of these might not be relevant!
Issued Shares (for cash) worth $ 40,000
Bought Back Shares (for cash) worth $ 20,000
Issued Long Term Debt (for cash) worth $ 17,000
Recognized Net Income of $ 90,000
Invested in Long Term Assets (for cash) worth $ 5,000
Sold Marketable Securities (for cash) worth $ 20,000
Declared and Paid Dividends of $ 30,000
(a) (4 pts) What was the ending balance for Retained Earnings?
(b) (4 pts) How much was Cash From Financing Activities?
5
3. (8 pts) Closing Entry - THIS IS INDEPENDENT OF THE PRIOR PROBLEMS
At the end of the year, the company’s books contain the following Trial Balances (All Adjusting
Entries have already been made). That is, all entries have been made except the closing entries.
Note that not all balance sheet accounts are shown.
Adjusted Trial Balance
Accounts Payable
100,000
Accumulated Depreciation and Amortization
200,000
Common Stock
350,000
Cost of Goods Sold
300,000
Depreciation and Amortization Expense
50,000
Dividends Payable
10,000
Interest Expense
40,000
Interest Payable
220,000
Inventory
140,,000
Litigation Loss
60,000
Retained Earnings
2,000,000
Sales Revenue
1,000,000
Selling and Administrative Expenses
400,000
• (5 pts) What is the Closing Journal Entry for the year?
Account Titles
Debit
Credit
• (3 pts) How much was NET INCOME for the year? Be sure to indicate if it’s a
profit or it’s a loss.
6
Question III (21 points) – Revenue Recognition
On January 1, 2022, a firm signs a customer to a 4-year, noncancelable contract for subscription
services. The total cost is $4800, payable in annual installments. The service commences
immediately (on January 1, 2022). The bill each year is sent on January 1, and it is due in 30
days.
1. (4 pts) What journal entry (or entries) does the firm make on January 1, 2022? (if any)
2. (3 pts) What journal entry (or entries) does the firm make when the customer makes the first
payment (if any)? Assume it was made on time.
3. (3 pts) What journal entry (or entries) does the firm make at the end of each month to record
pro-rata delivery of service (if any)?
4. (3 pts) What is the balance for Unearned Revenue on the balance sheet on December 31,
2022?
7
5. (3 pts) How much cash has the firm not yet collected on this contract at the end of December
31, 2022?
6. (5 pts) A consultant claims that if the firm billed for the entire 4 years up front at the
beginning of the contract (i.e., $4800), it could report revenue quicker. Do you agree?
Explain.
8
Question IV (17 points) Financial Statement Analysis
Below are selected financial ratios for two years from a company. Note that ROE, which is an
important measure of firm profitability, is higher in year 2 than in year 1.
Year 2
Year 1
83.33%
73.91%
0.75
0.69
12.50%
9.71%
2.33
1.17
3.33
2.17
0.70
0.54
25.00%
34.00%
1.25
1.25
2.00
3.50
1. (13 pts) Given the ratios above, explain what the drivers were of the increase in ROE.
Provide as much detail as you can. Explain which specific ratios you are referring to, and
use the numbers to explain the magnitudes of the effects (not just the directions). NOTE
THAT I AM ONLY INTERESTED IN PROFITABILITY HERE – NOT LIQUIDITY OR
SOLVENCY. HINT – SOME OF THE RATIOS ARE IRRELEVANT!
9
2. (4 pts) Based on the numbers above, are there any potential “negative consequences”
associated with how the firm increased its ROE? Explain.
10
Question V – (17 points) Cash Flow Statement
Refer to the excerpts (contained at the back of this booklet) from the 2021 Annual Report
of Procter and Gamble (P&G)
1. (3 pts) How much did P&G spend on business acquisitions in 2019? NOTE THE YEAR!
2. (3 pts) In which year did Accounts Receivable increase the most? Explain.
3. (3 pts) In which year did Depreciation and Amortization add the most cash flow? Explain.
11
4. (4 pts) P&G had a huge outflow of cash in 2021 related to FINANCING Activities. What
were the two types of financing activities for which P&G’s outflows were most different than
for the corresponding activity in 2020?
5. (4 pts) For the three years of data provided, why are Cash From Operations and Net Income
most different from each other in 2019 compared to the other two years? I don’t want a
detailed dollar-for-dollar reconciliation; I want the biggest factor. Also, EXPLAIN WHY
this item causes income and cash to be different from each other.
Consolidated Statements of Cash Flows
Amounts in millions; Years ended June 30
2021 2020 2019
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR
$ 16,181 $ 4,239 $ 2,569
OPERATING ACTIVITIES
Net earnings 14,352 13,103 3,966
Depreciation and amortization 2,735 3,013 2,824
Loss on early extinguishment of debt 512 — —
Share-based compensation expense 540 558 515
Deferred income taxes (258) (596) (411)
Loss/(gain) on sale of assets (16) 7 (678)
Goodwill and indefinite-lived intangible impairment charges — — 8,345
Change in accounts receivable (342) 634 (276)
Change in inventories (309) (637) (239)
Change in accounts payable, accrued and other liabilities 1,391 1,923 1,856
Change in other operating assets and liabilities (369) (710) (973)
Other 135 108 313
TOTAL OPERATING ACTIVITIES
18,371 17,403 15,242
INVESTING ACTIVITIES
Capital expenditures (2,787) (3,073) (3,347)
Proceeds from asset sales 42 30 394
Acquisitions, net of cash acquired (34) (58) (3,945)
Purchases of investment securities (55) — (158)
Proceeds from sales and maturities of investment securities — 6,151 3,628
Change in other investments — (5) (62)
TOTAL INVESTING ACTIVITIES
(2,834) 3,045 (3,490)
FINANCING ACTIVITIES
Dividends to shareholders (8,263) (7,789) (7,498)
Increases/(reductions) in short-term debt (3,333) 2,345 (2,215)
Additions to long-term debt 4,417 4,951 2,367
Reductions of long-term debt
(1)
(4,987) (2,447) (969)
Treasury stock purchases (11,009) (7,405) (5,003)
Impact of stock options and other 1,644 1,978 3,324
TOTAL FINANCING ACTIVITIES
(21,531) (8,367) (9,994)
EFFECT OF EXCHANGE RATE CHANGES ON CASH, CASH EQUIVALENTS
AND RESTRICTED CASH
101 (139) (88)
CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(5,893) 11,942 1,670
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR
$ 10,288 $ 16,181 $ 4,239
SUPPLEMENTAL DISCLOSURE
Cash payments for interest $ 531 $ 434 $ 497
Cash payments for income taxes 3,822 3,550 3,064
(1)
Includes early extinguishment of debt costs of $512 in 2021.
42 The Procter & Gamble Company
See accompanying Notes to Consolidated Financial Statements.
Accounting Waiver Sample Midterm - SOLUTION
1
Name
ACCOUNTING 6130
Sample Midterm Exam -- SOLUTION
Instructions:
• Please print your name in the space provided above
• The exam is open-book, open-notes
• The exam is to be done individually!
Question Points Possible Points Scored
Question I (Mechanics) 31
Question II (Miscellaneous) 20
Question III (Revenue Recognition) 21
Question IV (FS Analysis) 17
Question V (Cash Flow) 17
T
otal . 106
Accounting Waiver Sample Midterm - SOLUTION
2
Question I: (31 points) Journal Entries
Give me the Journal Entries for each of the following transactions / events.
Answer each of these independently
1. (3 pts) A firm borrows $10,000 in cash in the form of a long-term note.
Dr Cash 10,000
Cr Notes Payable 10,000
2. (3 pts) A firm buys Inventory on Credit for $20,000.
Dr Inventory 20,000
Cr Accounts Payable 20,000
3. (3 pts) A firm records $30,000 of Depreciation Expense.
Dr Depreciation Expense 30,000
Cr Accumulated Depreciation 30,000
4. (4 pts) Employees earn $40,000 in wages this year. Of this amount, $35,000 was paid in
cash and the remainder will be paid next year.
Dr Wage Expense 40,000
Cr Cash 35,000
Wages Payable 5,000
Accounting Waiver Sample Midterm - SOLUTION
3
5. (8 pts) A firm sells Inventory that originally cost them $60,000. The inventory had been
purchased and paid for last year. The firm receives $25,000 in Cash and also receives a
Receivable in the amount of $40,000.
• What are the journal entries this year?
Dr Cash 25,000
Accounts Receivable 40,000
Cr Sales Revenue 65,000
Dr COGS 60,000
Cr Inventory 60,000
• How does the above transaction show up on the cash flow statement? (Give me the effect
on income and the applicable adjusting entries, if any)
Impact on Net Income = Revenue – COGS = 65,000 – 60,000 = 5,000
Adjustments
Increase in Accounts Receivables (40,000)
Decrease in Inventory 60,000
Cash From Operations 25,000
6. (10 pts) A firm sells land that it had purchased many years ago for $100,000. It receives
shares of stock (from the selling company) valued at $900,000. The firm’s main business
does not involve buying and selling land.
• What are the journal entries?
Dr Common Stock 900,000
Cr Land 100,000
Gain on Sale 800,000
Note that the buyer was holding some of our shares worth $900,000. Therefore, we’re getting
some of our shares back. The Debit could have been to Treasury Stock as well.
If instead you interpreted the problem as saying the buyer gave 900,000 worth of his own stock,
then the debit would be to a Marketable Securities type account. This was perfectly fine too.
• Are any adjusting entries required on the cash flow statement? Explain.
Yes. Net Income, which is the starting point for cash from operations contains the gain of
$800,000. This is not cash so we have to adjust it out. We do this with a “negative
adjustment” – we subtract out the gain. Note that there is no cash at all from this transaction!
• Is a footnote to the cash flow statement required related to this transaction? Explain.
Yes, this is a noncash investing /financing activity
Accounting Waiver Sample Midterm - SOLUTION
4
Question II (20 points) Miscellaneous
Answer each of the following independently
1. (4 pts) Suppose the Beginning Balance of Inventory was $100,000. The firm purchased
$20,000 of inventory for cash and $30,000 of inventory on credit that it has not yet paid.
Ending Inventory was $40,000.
How much was the Cost of Goods Sold?
Ending Inv = Beg Inv + Cost of Purchases – COGS
40,000 = 100,000 + (20,000 + 30,000) – COGS
COGS = 110,000
Inventory went down by 60,000, so we much have sold 60,000 more than we bought. We
bough 50,000, so the COGS has to be 110,000
2. (8 pts) Suppose that Retained Earnings was $150,000 at the beginning of the year. During
the year, we did the following (all of this has already been entered into the accounts, and the
closing entries have taken place): Some of these might not be relevant!
Issued Shares (for cash) worth $ 40,000
Bought Back Shares (for cash) worth $ 20,000
Issued Long Term Debt (for cash) worth $ 17,000
Recognized Net Income of $ 90,000
Invested in Long Term Assets (for cash) worth $ 5,000
Sold Marketable Securities (for cash) worth $ 20,000
Declared and Paid Dividends of $ 30,000
(a) (4 pts) What was the ending balance for Retained Earnings?
Ending RE = Beg RE + Net Income – Dividends
= 150,000 + 90,000 – 30,000 = 150,000 + 60,000 = 210,000
(b) (4 pts) How much was Cash From Financing Activities?
Issued Shares gives us cash 40,000
Buying back shares costs us cash (20,000)
Issuing long term debt gives us cash 17,000
Paying a dividend costs us cash (30,000)
Cash from Financing 7,000
Accounting Waiver Sample Midterm - SOLUTION
5
3. (8 pts) Closing Entry - THIS IS INDEPENDENT OF THE PRIOR PROBLEMS
At the end of the year, the company’s books contain the following Trial Balances (All Adjusting
Entries have already been made). That is, all entries have been made except the closing entries.
Note that not all balance sheet accounts are shown.
Adjusted Trial Balance
Accounts Payable
100,000
Accumulated Depreciation and Amortization
200,000
Common Stock
350,000
Cost of Goods Sold
300,000
Depreciation and Amortization Expense
50,000
Dividends Payable
10,000
Interest Expense
40,000
Interest Payable
220,000
Inventory
140,,000
Litigation Loss
60,000
Retained Earnings
2,000,000
Sales Revenue
1,000,000
Selling and Administrative Expenses
400,000
• (5 pts) What is the Closing Journal Entry for the year?
Account Titles
Debit
Credit
Sales Revenue
1,000,000
COGS
300,000
Selling and Admin Expenses
400,000
Depreciation and Amortiz Expense
50,000
Litigation Loss
60,000
Interest Expense
40,000
Retained Earnings (plug)
150,000
• (3 pts) How much was NET INCOME for the year? Be sure to indicate if it’s a
profit or it’s a loss.
Net Income = 1,000,000 – (300,000 + 400,000 + 50,000 + 60,000 + 40,000) = 150,000
Ending Balance of RE = Beginning Balance + NI = 2,000,000 +150,000 = 2,150,000
Accounting Waiver Sample Midterm - SOLUTION
6
Question III (21 points) – Revenue Recognition
On January 1, 2022, a firm signs a customer to a 4-year, noncancelable contract for subscription
services. The total cost is $4800, payable in annual installments. The service commences
immediately (on January 1, 2022). The bill each year is sent on January 1, and it is due in 30
days.
1. (4 pts) What journal entry (or entries) does the firm make on January 1, 2022? (if any)
On January 1 we commenced providing service and we sent a bill
Dr Accounts Receivable 1200 (=4800 / 4)
Cr Unearned Revenue 1200
You Could use Deferred Revenue or Advances from Customers account titles instead
Technically we could also record a day’s worth of revenue.
2. (3 pts) What journal entry (or entries) does the firm make when the customer makes the first
payment (if any)? Assume it was made on time.
Dr Cash 1200
Cr Accounts Receivable 1200
Note that receiving cash does not trigger any recognition of revenue.
3. (3 pts) What journal entry (or entries) does the firm make at the end of each month to record
pro-rata delivery of service (if any)?
Dr Unearned Revenue 100 (1/12
th
of the annual amount)
Sales Revenue 100
4. (3 pts) What is the balance for Unearned Revenue on the balance sheet on December 31,
2022?
ZERO – note that we haven’t billed anything for the next year yet
Accounting Waiver Sample Midterm - SOLUTION
7
5. (3 pts) How much cash has the firm not yet collected on this contract at the end of December
31, 2022?
$3600 – this is not on the balance sheet anywhere, but you could disclose it in a footnote
6. (5 pts) A consultant claims that if the firm billed for the entire 4 years up front at the
beginning of the contract (i.e., $4800), it could report revenue quicker. Do you agree?
Explain.
No. This speeds up the collection of cash (which could be a good thing), but it does not
speed up the recognition of revenue. We recognize revenue as we deliver the service (it will
still be $100 a month).
A negative consequence is that we may lose customers if the whole thing is due up front, or
we might have to lower the price (to compensate for the time value of money)
Accounting Waiver Sample Midterm - SOLUTION
8
Question IV (17 points) Financial Statement Analysis
Below are selected financial ratios for two years from a company. Note that ROE, which is an
important measure of firm profitability, is higher in year 2 than in year 1.
Year 2
Year 1
83.33%
73.91%
0.75
0.69
12.50%
9.71%
2.33
1.17
3.33
2.17
0.70
0.54
25.00%
34.00%
1.25
1.25
2.00
3.50
1. (13 pts) Given the ratios above, explain what the drivers were of the increase in ROE.
Provide as much detail as you can. Explain which specific ratios you are referring to, and
use the numbers to explain the magnitudes of the effects (not just the directions). NOTE
THAT I AM ONLY INTERESTED IN PROFITABILITY HERE – NOT LIQUIDITY OR
SOLVENCY. HINT – SOME OF THE RATIOS ARE IRRELEVANT!
First, we can decompose ROE into two drivers: Operating Performance and Financial Leverage
Operating Performance is Measured by ROA
Financial Leverage is Measure by Leverage Ratio B (Assets / Stockholders Equity)
ROE = Net Income = Net Income x Total Assets
Share Equity Assets Share Equity
Year 2
Year 1
ROE
83.33%
73.91%
ROA
25.00%
34.00%
Leverage Ratio B
3.33
2.17
Check: ROA x Lev
83.33%
73.91%
Note that the increase in ROE in year 2 is entirely driven by the increase in leverage! Operating
Performance (ROA) is actually worse.
The firm did worse with its assets (in terms of ROA) but used a lot of debt to leverage this into a
higher return for shareholders (but see the next part)
Accounting Waiver Sample Midterm - SOLUTION
9
Next, we can decompose ROA into two drivers: Profit Margin and Asset Turnover
ROA = Net Income = Net Income x Sales
Total Assets Sales Total Assets
Year 2
Year 1
ROA
25.00%
34.00%
Profit Margin
12.50%
9.71%
Asset Turnover
2.00
3.50
Check: PM x AT
25.00%
34.00%
Vulcan’s ROA in year 2 was lower despite a higher profit margin. This is because assets did not
generate as many dollars in sales as in year 1.
If we had more detailed data, we could explore the reasons for the higher profit margin (and if
we thought it was recurring). We could also look at why assets are not generating as much sales.
(maybe there is a big increase in assets – funded by debt – and it will take more time to see the
increase in sales? )
2. (4 pts) Based on the numbers above, are there any potential “negative consequences”
associated with how the firm increased its ROE? Explain.
One of the factors that caused ROE to go up is the higher leverage. Higher leverage means more
debt in the capital structure, which implies a greater risk of default.
Accounting Waiver Sample Midterm - SOLUTION
10
Question V – (17 points) Cash Flow Statement
Refer to the excerpts (contained at the back of this booklet) from the 2021 Annual Report
of Procter and Gamble (P&G)
1. (3 pts) How much did P&G spend on business acquisitions in 2019? NOTE THE YEAR!
From the Investing Section: Acquisitions 3945
2. (3 pts) In which year did Accounts Receivable increase the most? Explain.
An increase in receivables is a NEGATIVE adjustment on the cash flow statement
The largest negative adjustment is (342) in 2021
3. (3 pts) In which year did Depreciation and Amortization add the most cash flow? Explain.
Depreciation doesn’t add cash. This adjustment exists to offset the noncash charge in the
income statement related to depreciation
Accounting Waiver Sample Midterm - SOLUTION
11
(4 pts) P&G had a huge outflow of cash in 2021 related to FINANCING Activities. What were
the two types of financing activities for which P&G’s outflows were most different than for the
corresponding activity in 2020?
Comparing 2021 and 2020 in the Financing Section, the biggest differences are
Reduction in Short Term debt: (3333) in 2021 compared to +2,345 in 2020
That is, the incurred more short term debt in 2020, and bought it back (or paid it off) in
2021
Treasury stock repurchases: (11,009) in 2021 compared to (7,405) in 2020
They bought back a lot more of their own shares
4. (4 pts) For the three years of data provided, why are Cash From Operations and Net Income
most different from each other in 2019 compared to the other two years? I don’t want a
detailed dollar-for-dollar reconciliation; I want the biggest factor. Also, EXPLAIN WHY
this item causes income and cash to be different from each other.
Net Income in 2019: $ 3,966
Cash from Operations in 2019: $15,242
The biggest adjustment to get from NI to CFO is Goodwill and indefinite lived intangible
impairment charges of 8,345
These are long term assets that P&G wrote down in 2019. These reduce income in 2019.
However, these are not cash outflows, so the cash flow statement adds them back.
Note that even though these are not cash outflows this year, they are a signal that future cash
inflows will be lower.
Accounting Waiver Sample Final Exam Questions
Name _____________________________________________ _________
Accounting 6130
Sample Final Exam
• Please print your name in the space provided above
• The points allocated to each problem are noted at the bottom of this page and at the beginning
of each problem.
• The exam is open-book, open-notes
•
The exam is to be done individually!
PROBLEM MAXIMUM SCORE
I. Accounts Receivable (Dow) 19
II. Long Term Assets (Dow) 21
III. Stockholders’ Equity (Dow) 25
IV. Income Taxes (Dow) 28
V. Inventory (Valero) 15
VI. Long Term Debt (Valero) 28
TOTAL 136
Accounting Waiver Sample Final Exam Questions
2
Question I (19 points) Accounts Receivable -- DOW
Refer to the excerpts from Dow’s financial statements. Assume a tax rate of 20% if necessary.
1. (3 pts) How much do customers owe to Dow at the end of 2021? Use the Trade Accounts
Receivable, not the “Other” Accounts Receivable. Also ignore Noncurrent Receivables.
2. (4 pts) What was the journal entry for Dow’s bad debt expense in 2021?
3. (3 pts) How much was Dow allowed to deduct on their income taxes related to bad debt /
writeoffs / customer defaults during 2021?
Accounting Waiver Sample Final Exam Questions
3
4. (5 pts) Assume that Dow’s bad debt expense is contained in their Selling, General and
Administrative Expense line on the income statement. How much did Dow collect from
customers in 2021?
5. (4 pts) Suppose (hypothetically) that a large set of Dow’s customers went bankrupt, and Dow
had to write off $40 (in millions) in Accounts Receivable. How would this likely affect pre-
tax income (if at all)? I’m not looking for a numerical calculation – just explain your
reasoning.
Accounting Waiver Sample Final Exam Questions
4
Question II. (21 Points) Long Term Assets -- DOW
Refer to the excerpts from Dow’s financial statements. If you need to assume a tax rate, use a
20% tax rate.
1. (2 pts) How much was Dow’s R&D Expense in 2021?
2. (5 pts) How much of Dow’s total “Depreciation and Amortization” is Depreciation?
3. (3 pts) How much Goodwill did Dow write down (impair) in 2019? (Note the year!)
4. (4 pts) Dow’s Goodwill also went down in 2021. Was this also from impairment?
Explain.
Accounting Waiver Sample Final Exam Questions
5
5. (3 pts) What is Dow’s largest identifiable intangible asset (not including goodwill) in
2021?
6. (4 pts) Accumulated Amortization for Dow’s “Software” intangible asset went DOWN,
not UP during 2021? How can this be?
Accounting Waiver Sample Final Exam Questions
6
Question III (25 points) Shareholders’ Equity -- DOW
Refer to the excerpts from Dow’s financial statements. If you need to assume a tax rate, use a
20% tax rate.
1. (2 pts) What is the par value per share of Dow’s common shares?
2. (3 pts) How many common shares outstanding does Dow have at the END of 2021?
3. (3 pts) What is the average price Dow has paid for the Treasury shares still listed on its
balance sheet at the end of 2021? (not how much did they pay IN 2021)
4. (2 pts) How much did Dow pay (in cash) in dividends to stockholders in 2021?
Accounting Waiver Sample Final Exam Questions
7
5. (2 pts) What is the balance for Accumulated Other Comprehensive Income (AOCI) at the end
of 2021?
6. (3 pts) Which of these has had the biggest impact on AOCI through the end of 2021 (not
necessarily DURING 2021)? (Circle one)
• Unrealized Gains and Losses on Investments
• Cumulative Translation Adjustment (on foreign assets and liabilities)
• Pensions and Other Post Retirement Benefits
• Derivatives
7. (2 pts) How much in stock-based compensation expense did Dow recognize during 2021?
8. (3 pts) How many exercisable options does Dow have at the end of 2021?
Accounting Waiver Sample Final Exam Questions
8
9. (5 pts) Suppose Dow grants employees new options this year (e.g., Year 1) with an exercise
price equal the market price at the date of grant. The options have a three-year vesting period.
During Year 2, Dow’s stock price goes up. Explain TWO reasons why these options lower
Dow’s DILUTED Earnings Per Share in Year 2. (no numerical calculations are needed)
Accounting Waiver Sample Final Exam Questions
9
Question IV (28 points) Income Taxes -- DOW
Refer to the excerpts from Dow’s financial statements. If you need to assume a tax rate, use a
20% tax rate. (Of course, if you’re asked to calculate a tax rate, 20% is probably not the right
answer for this question).
1. (2 pts) How much is DOW’s income tax expense (on continuing operations) in year
2021? (You do not need to separately provide Federal, State and Foreign tax expenses, just the
total). Be sure to indicate if this is an expense or a benefit.
2. (2 pts) How much is DOW’s Current Portion of their Income Tax Expense in 2021?
(You do not need to separately provide Federal, State and Foreign components of this, just the
total). Be sure to indicate if this is an expense or a benefit.
3. (3 pts) What was Dow’s effective tax rate in 2021?
4. (5 pts) Calculate Dow’s “cash effective tax rate” in 2021. This is the ratio of “cash taxes
paid” to Pre-tax Book Income. (this is what the new tax bill will look at to establish a
minimum tax).
Accounting Waiver Sample Final Exam Questions
10
5. (4 pts) Did Dow face a higher or lower tax rate on its foreign income relative to the US federal
rate of 21% in 2021? Explain.
6. (4 pts) What is the biggest reason why Dow’s effective tax rate is so much HIGHER than
the US Federal rate in 2020? (NOTE THE YEAR!) Give me the “line item” and explain why
this increases Dow’s effective tax rate
Accounting Waiver Sample Final Exam Questions
11
7. (4 pts) Dow’s pre-tax book income is negative in 2019 (note the year). Do you think the
income they reported to taxing authorities in 2019 was negative? Explain.
8. (4 pts) How much of Dow’s Tax Operating Loss Carryforwards expire more than 5 years
from now? Give me a dollar amount. Does Dow’s calculation of this Deferred Tax Asset
reflect the time value of money? Explain.
Accounting Waiver Sample Final Exam Questions
12
V. Inventory (15 points) - VALERO
Refer to the excerpts from Valero Corporation’s financial statements. Valero is an Oil and Gas
Company. Assume a 20% tax rate if necessary.
1. (3 pts) How much is Valero’s LIFO Reserve at the end of 2021? (give me a number)
2. (4 pts) Valero’s pre-tax income in 2021 was $1,543 (in millions). What would their pre-
tax income have been in 2021 had they always been using FIFO for their inventory valuation?
(give me a number)
3. (4 pts) How much has Valero saved in taxes cumulatively through the end of 2021 through
the use of LIFO? (assume a 20% tax rate has always applied)
Accounting Waiver Sample Final Exam Questions
13
4. (4 pts) Valero’s footnotes report that in 2020 they experienced a Lower of Cost or Market
Adjustment. This is essentially a write-down of inventory. Explain why Inventory write
downs are less common for firms that use LIFO compared to firms that use FIFO.
Accounting Waiver Sample Final Exam Questions
14
Question VI (28 points) Long Term Debt -- VALERO
Refer to the excerpts from Valero’s financial statements. Valero is an Oil and Gas company. If
you need to assume a tax rate, use a 20% tax rate.
1. (3 pts) How much in LEASES are included in Valero’s Debt line of the balance sheet at the
end of 2021? (give me a dollar number)
2. (4 pts) If debt was issued at a discount, which of the following is true (Circle one)
• Interest Expense is smaller than Coupon Payment
• Interest Expense is equal to the Coupon Payment
• Interest Expense is greater than the Coupon Payment
3. (3 pts) What is the fair value of Valero’s debt (excluding leases) at the end of 2021? (give me a
dollar number)
4. (4 pts) Based on the comparison of Valero’s book value and fair value of their debt (excluding
leases), what has happened to market interest rates, on average, since their debt was issued?
(Circle one)
• Interest Rates Went Down
• Interest Rates Have Stayed the Same
• Interest Rates Went Up
Accounting Waiver Sample Final Exam Questions
15
5. (14 pts) Consider Valero’s 4% Senior Notes due in 2029. For convenience, assume that the
interest payments are due on June 30 and December 31. Therefore, this debt is due exactly 8
years (or 16 semi-annual periods) from the date of the financial statements. Suppose market
interest rates jumped to 10% at the end of December 31, 2021 (remember that we have to use
semi-annual compounding).
a. (4 pts) What is the semi-annual coupon payment that Valero makes on this debt?
b. (3 pts) What is the (updated) present value of the stream of coupon payments
Valero will be making on this debt (as assessed on December 31, 2021 – the date
the interest rates jumped up)?
c. (3 pts) What is the market value of this debt (on December 31, 2021)?
d. (4 pts) What effect does this spike in interest rates have on the book value of this
Senior Note? (circle one)
• Decreases the Book Value
• Has No Effect on the Book Value
• Increases the Book Value
ACCOUNTING 6130
Final Exam
Excerpts from Financing Statements
Note: This booklet contains excerpts from TWO sets of financial statements:
Dow and Valero
M
ake sure you’re referring to the correct set of financial statements when
answering a problem!
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission
File Number
Exact Name of Registrant as Specified in its Charter,
Principal Office Address and Telephone Number
State of
Incorporation or
Organization
I.R.S. Employer
Identification No.
001-38646
Dow Inc.
Delaware 30-1128146
2211 H.H. Dow Way, Midland, MI 48674
(989) 636-1000
001-03433
The Dow Chemical Company
Delaware 38-1285128
2211 H.H. Dow Way, Midland, MI 48674
(989) 636-1000
Dow Inc. and Subsidiaries
Consolidated Statements of Income
(In millions, except per share amounts) For the years ended Dec 31,
2021 2020 2019
Net sales
$ 54,968 $ 38,542 $ 42,951
Cost of sales
44,191 33,346 36,657
Research and development expenses
857 768 765
Selling, general and administrative expenses
1,645 1,471 1,590
Amortization of intangibles
388 401 419
Restructuring, goodwill impairment and asset related charges - net
6 708 3,219
Integration and separation costs
— 239 1,063
Equity in earnings (losses) of nonconsolidated affiliates
975 (18) (94)
Sundry income (expense) - net
(35) 1,269 461
Interest income
55 38 81
Interest expense and amortization of debt discount
731 827 933
Income (loss) from continuing operations before income taxes
8,145 2,071 (1,247)
Provision for income taxes on continuing operations
1,740 777 470
Income (loss) from continuing operations, net of tax
6,405 1,294 (1,717)
Income from discontinued operations, net of tax
— — 445
Net income (loss)
6,405 1,294 (1,272)
Net income attributable to noncontrolling interests
94 69 87
Net income (loss) available for Dow Inc. common stockholders
$ 6,311 $ 1,225 $ (1,359)
Per common share data:
Earnings (loss) per common share from continuing operations - basic
$ 8.44 $ 1.64 $ (2.42)
Earnings per common share from discontinued operations - basic
— — 0.58
Earnings (loss) per common share - basic
$ 8.44 $ 1.64 $ (1.84)
Earnings (loss) per common share from continuing operations - diluted
$ 8.38 $ 1.64 $ (2.42)
Earnings per common share from discontinued operations - diluted
— — 0.58
Earnings (loss) per common share - diluted
$ 8.38 $ 1.64 $ (1.84)
Weighted-average common shares outstanding - basic
743.6 740.5 742.5
Weighted-average common shares outstanding - diluted
749.0 742.3 742.5
See Notes to the Consolidated Financial Statements.
73
Dow Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In millions) For the years ended Dec 31,
2021 2020 2019
Net income (loss)
$ 6,405 $ 1,294 $ (1,272)
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on investments
(45) 40 115
Cumulative translation adjustments
(425) 205 (32)
Pension and other postretirement benefit plans
2,225 (778) (899)
Derivative instruments
123 (76) (338)
Total other comprehensive income (loss)
1,878 (609) (1,154)
Comprehensive income (loss)
8,283 685 (2,426)
Comprehensive income attributable to noncontrolling interests, net of tax
94 69 99
Comprehensive income (loss) attributable to Dow Inc.
$ 8,189 $ 616 $ (2,525)
See Notes to the Consolidated Financial Statements.
74
Dow Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except share amounts) At Dec 31,
2021 2020
Assets
Current Assets
Cash and cash equivalents
$ 2,988 $ 5,104
Accounts and notes receivable:
Trade (net of allowance for doubtful receivables - 2021: $54; 2020: $51)
6,841 5,090
Other
2,713 2,300
Inventories
7,372 5,701
Other current assets
934 889
Total current assets
20,848 19,084
Investments
Investment in nonconsolidated affiliates
2,045 1,327
Other investments (investments carried at fair value - 2021: $2,079; 2020: $1,674)
3,193 2,775
Noncurrent receivables
478 465
Total investments
5,716 4,567
Property
Property
57,604 56,325
Less: Accumulated depreciation
37,049 36,086
Net property
20,555 20,239
Other Assets
Goodwill
8,764 8,908
Other intangible assets (net of accumulated amortization - 2021: $4,725; 2020: $4,428)
2,881 3,352
Operating lease right-of-use assets
1,412 1,856
Deferred income tax assets
1,358 2,215
Deferred charges and other assets
1,456 1,249
Total other assets
15,871 17,580
Total Assets
$ 62,990 $ 61,470
Liabilities and Equity
Current Liabilities
Notes payable
$ 161 $ 156
Long-term debt due within one year
231 460
Accounts payable:
Trade
5,577 3,763
Other
2,839 2,126
Operating lease liabilities - current
314 416
Income taxes payable
623 397
Accrued and other current liabilities
3,481 3,790
Total current liabilities
13,226 11,108
Long-Term Debt
14,280 16,491
Other Noncurrent Liabilities
Deferred income tax liabilities
506 405
Pension and other postretirement benefits - noncurrent
7,557 11,648
Asbestos-related liabilities - noncurrent
931 1,013
Operating lease liabilities - noncurrent
1,149 1,521
Other noncurrent obligations
6,602 6,279
Total other noncurrent liabilities
16,745 20,866
Stockholders’ Equity
Common stock (authorized 5,000,000,000 shares of $0.01 par value each;
issued 2021: 764,226,882 shares; 2020: 755,993,198 shares) 8 8
Additional paid-in capital
8,151 7,595
Retained earnings
20,623 16,361
Accumulated other comprehensive loss
(8,977) (10,855)
Unearned ESOP shares
(15) (49)
Treasury stock at cost (2021: 29,011,573 shares; 2020: 12,803,303 shares)
(1,625) (625)
Dow Inc.’s stockholders’ equity
18,165 12,435
Noncontrolling interests
574 570
Total equity
18,739 13,005
Total Liabilities and Equity
$ 62,990 $ 61,470
See Notes to the Consolidated Financial Statements.
75
Dow Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In millions) For the years ended Dec 31, 2021 2020 2019
Operating Activities
Net income (loss) $ 6,405 $ 1,294 $ (1,272)
Less: Income from discontinued operations, net of tax — — 445
Income (loss) from continuing operations, net of tax 6,405 1,294 (1,717)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 2,842 2,874 2,938
Provision (credit) for deferred income tax 278 258 (228)
Earnings of nonconsolidated affiliates less than (in excess of) dividends received (651) 443 1,114
Net periodic pension benefit cost 39 266 144
Pension contributions (1,219) (299) (261)
Net gain on sales of assets, businesses and investments
(105) (802) (81)
Restructuring, goodwill impairment and asset related charges - net 6 708 3,219
Other net loss 921 318 198
Changes in assets and liabilities, net of effects of acquired and divested companies:
Accounts and notes receivable (2,132) 171 1,253
Inventories (1,768) 515 668
Accounts payable 2,458 (84) (948)
Other assets and liabilities, net (5) 590 (586)
Cash provided by operating activities - continuing operations 7,069 6,252 5,713
Cash provided by (used for) operating activities - discontinued operations (60) (26) 217
Cash provided by operating activities 7,009 6,226 5,930
Investing Activities
Capital expenditures
(1,501) (1,252) (1,961)
Investment in gas field developments (92) (5) (76)
Purchases of previously leased assets
(694) (5) (9)
Proceeds from sales of property and businesses, net of cash divested 68 929 84
Acquisitions of property and businesses, net of cash acquired
(129) (130) —
Investments in and loans to nonconsolidated affiliates — (333) (638)
Distributions and loan repayments from nonconsolidated affiliates 51 7 89
Purchases of investments (1,366) (1,203) (899)
Proceeds from sales and maturities of investments 759 1,122 1,252
Other investing activities, net (10) 29 —
Cash used for investing activities - continuing operations (2,914) (841) (2,158)
Cash used for investing activities - discontinued operations — — (34)
Cash used for investing activities (2,914) (841) (2,192)
Financing Activities
Changes in short-term notes payable (48) (431) 307
Proceeds from issuance of short-term debt greater than three months 144 163 —
Payments on short-term debt greater than three months (130) (163) —
Proceeds from issuance of long-term debt 109 4,672 2,287
Payments on long-term debt (2,771) (4,653) (5,561)
Purchases of treasury stock (1,000) (125) (500)
Proceeds from issuance of stock 320 108 93
Transaction financing, debt issuance and other costs (537) (175) (119)
Employee taxes paid for share-based payment arrangements (12) (27) (60)
Distributions to noncontrolling interests (73) (62) (77)
Purchases of noncontrolling interests — — (297)
Dividends paid to stockholders (2,073) (2,071) (1,550)
Dividends paid to DowDuPont Inc. — — (535)
Settlements and transfers related to separation from DowDuPont Inc. — — 1,935
Cash used for financing activities - continuing operations (6,071) (2,764) (4,077)
Cash used for financing activities - discontinued operations — — (18)
Cash used for financing activities (6,071) (2,764) (4,095)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (99) 107 (27)
Summary
Increase (decrease) in cash, cash equivalents and restricted cash (2,075) 2,728 (384)
Cash, cash equivalents and restricted cash at beginning of year 5,108 2,380 2,764
Cash, cash equivalents and restricted cash at end of year $ 3,033 $ 5,108 $ 2,380
Less: Restricted cash and cash equivalents, included in "Other current assets" 45 4 13
Cash and cash equivalents at end of year $ 2,988 $ 5,104 $ 2,367
See Notes to the Consolidated Financial Statements.
76
Dow Inc. and Subsidiaries
Consolidated Statements of Equity
(In millions, except per share amounts) For the years ended Dec 31,
2021 2020 2019
Common Stock
Balance at beginning of year $ 8 $ 8 $ —
Common stock issued — — 8
Balance at end of year 8 8 8
Additional Paid-in Capital
Balance at beginning of year 7,595 7,325 7,042
Common stock issued / sold 320 108 57
Issuance of parent company stock - DowDuPont Inc. — — 28
Stock-based compensation and allocation of ESOP shares 236 162 235
Other — — (37)
Balance at end of year 8,151 7,595 7,325
Retained Earnings
Balance at beginning of year 16,361 17,045 35,460
Net income (loss) available for Dow Inc.'s common stockholders 6,311 1,225 (1,359)
Dividends to stockholders (2,073) (2,071) (1,550)
Dividends to DowDuPont Inc. — — (535)
Common control transaction 46 177 (14,806)
Adoption of accounting standards — — (151)
Other (22) (15) (14)
Balance at end of year 20,623 16,361 17,045
Accumulated Other Comprehensive Loss
Balance at beginning of year (10,855) (10,246) (9,885)
Other comprehensive income (loss) 1,878 (609) (1,154)
Common control transaction — — 793
Balance at end of year (8,977) (10,855) (10,246)
Unearned ESOP Shares
Balance at beginning of year (49) (91) (134)
Stock-based compensation and allocation of ESOP shares 34 42 45
ESOP shares acquired — — (2)
Balance at end of year (15) (49) (91)
Treasury Stock
Balance at beginning of year (625) (500) —
Treasury stock purchases (1,000) (125) (500)
Balance at end of year (1,625) (625) (500)
Dow Inc.'s stockholders' equity 18,165 12,435 13,541
Noncontrolling Interests 574 570 553
Total Equity $ 18,739 $ 13,005 $ 14,094
Dividends declared per share of common stock $ 2.80 $ 2.80 $ 2.10
See Notes to the Consolidated Financial Statements.
77
NOTE 6 – RESTRUCTURING, GOODWILL IMPAIRMENT AND ASSET RELATED CHARGES - NET
The "Restructuring, goodwill impairment and asset related charges - net" line in the consolidated statements of
income is used to record charges for restructuring programs, goodwill impairments, and other asset related charges,
which includes other asset impairments.
95
2019 Goodwill Impairment
Upon completion of the goodwill impairment testing in the fourth quarter of 2019, the Company determined the
fair value of the Coatings & Performance Monomers reporting unit was lower than its carrying amount. As a result,
the Company recorded an impairment charge of $1,039 million in the fourth quarter of 2019, related to
Performance Materials & Coatings. See Note 13 for additional information.
Asset Related Charges
2020 Charges
In 2020, the Company recognized pretax impairment charges of $49 million, including additional pretax
impairment charges for capital additions made to a bio-ethanol manufacturing facility in Santa Vitoria, Minas
Gerais, Brazil ("Santa Vitoria"), which was impaired in 2017 and divested in 2020, as well as charges for
miscellaneous write-offs and write-downs of non-manufacturing assets and the write-down of certain corporate
leased equipment. The impairment charges related to Packaging & Specialty Plastics ($19 million),
Performance Materials & Coatings ($15 million) and Corporate ($15 million). See Note 23 for additional
information.
2019 Charges
the fourth quarter of 2019, upon completion of an evaluation of its equity method investment in Sadara Chemical
Company ("Sadara") for other-than-temporary impairment, the Company determined that its investment in
Sadara was other-than-temporarily impaired and it was written down to zero. Additionally, as part of Dow's
evaluation of Sadara, the Company reserved certain of its notes and accounts receivable with Sadara due to
uncertainty on the timing of collection. As a result, the Company recorded a $1,755 million charge, related to
Packaging & Specialty Plastics ($370 million), Industrial Intermediates & Infrastructure ($1,168 million) and
Corporate ($217 million). See Notes 12 and 23 for additional information.
97
Supplemental Cash Flow Information
The following table shows cash paid for interest and income taxes for the years ended December 31, 2021, 2020
and 2019:
Supplemental Cash Flow Information
2021 2020 2019
In millions
Cash paid during year for:
Interest
$ 801 $ 842 $ 993
Income taxes
$ 731 $ 518 $ 881
NOTE 8 – INCOME TAXES
The financial statements for Dow Inc. and TDCC are substantially similar, including the reporting of current and
deferred tax expense (benefit), provision for income taxes on continuing operations, and deferred tax asset and
liability balances. As a result, the following income tax discussion pertains to Dow Inc. only.
Geographic Allocation of Income and Provision for Income Taxes on
Continuing Operations
In millions
2021 2020 2019
Income (loss) from continuing operations before income taxes
Domestic
1
$ 1,523 $ (681) $ (1,196)
Foreign
2
6,622 2,752 (51)
Income (loss) from continuing operations before income taxes $ 8,145 $ 2,071 $ (1,247)
Current tax expense (benefit)
Federal $ (46) $ (176) $ (287)
State and local 48 4 25
Foreign 1,460 691 960
Total current tax expense $ 1,462 $ 519 $ 698
Deferred tax expense (benefit)
Federal $ 130 $ 184 $ 52
State and local 26 19 19
Foreign 122 55 (299)
Total deferred tax expense (benefit) $ 278 $ 258 $ (228)
Provision for income taxes on continuing operations $ 1,740 $ 777 $ 470
Income (loss) from continuing operations, net of tax $ 6,405 $ 1,294 $ (1,717)
1. The 2019 amount includes approximately $1.4 billion of expense related to goodwill impairment and environmental matters. See Notes 13 and
16 for additional information.
2. The 2019 amount includes approximately $1.8 billion of expense for Sadara related charges. See Note 12 for additional information.
99
Reconciliation to U.S. Statutory Rate
2021 2020
1
2019
1
Statutory U.S. federal income tax rate 21.0 % 21.0 % 21.0 %
Equity earnings effect (2.2) 0.2 (3.2)
Foreign income taxed at rates other than the statutory U.S. federal income tax
rate (1.3) (2.3) (14.8)
U.S. tax effect of foreign earnings and dividends 1.7 3.9 1.9
Unrecognized tax benefits 4.7 7.3 1.0
Divestitures
2
— (5.1) —
Changes in valuation allowances 2.6 12.6 —
Impact of tax reform
3
— — 11.1
Federal tax accrual adjustment
4
(5.3) 0.3 10.4
State and local income taxes 0.2 0.3 (4.4)
Sadara related charges
5
— — (29.5)
Goodwill impairment
6
— — (17.5)
Other - net — (0.7) (13.7)
Effective tax rate 21.4 % 37.5 % (37.7) %
1. Certain prior year rates have been adjusted to conform with the current year presentation.
2. The 2020 impact relates to the divestiture of a bio-ethanol manufacturing facility in Brazil. See Note 6 for additional information.
3. Includes the impact of tax reform in Switzerland and the United States.
4. The 2021 impact represents a capital loss incurred on an internal restructuring fully offset by a valuation allowance reported in "Changes in
valuation allowances" line item. The 2019 impact primarily relates to the favorable impact of the restoration of tax basis in assets, driven by a
court judgment that did not involve the Company.
5. See Note 12 for additional information.
6. See Note 13 for additional information.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the
United States. While the CARES Act had no significant impact on the Company's provision for income taxes on
continuing operations in 2020, the Company filed a tax loss carryback claim for $291 million in accordance with the
provisions of the CARES Act in 2020. This resulted in an increase in "Accounts and notes receivable - other" and a
decrease in "Deferred income tax assets" in the consolidated balance sheets. In 2021, the Company received
$247 million of the tax loss carryback claim with the residual balance expected to be received in 2022.
In the fourth quarter of 2020, a valuation allowance of $260 million was recorded in the United States, primarily due
to filing of the final combined Dow and DuPont tax return and related unutilized foreign tax credits. In 2021, the
Company's strong earnings and revised projections resulted in a reversal of the valuation allowance.
Deferred Tax Balances at Dec 31
2021 2020
1
In millions
Assets Liabilities Assets Liabilities
Property $ 484 $ 3,150 $ 448 $ 3,337
Tax loss and credit carryforwards 1,784 — 2,004 —
Postretirement benefit obligations 1,753 303 2,712 250
Other accruals and reserves 1,487 191 1,542 78
Intangibles 108 556 124 638
Inventory 33 203 30 198
Investments 31 26 142 51
Other – net 1,093 101 858 196
Subtotal $ 6,773 $ 4,530 $ 7,860 $ 4,748
Valuation allowances (1,391) — (1,302) —
Total $ 5,382 $ 4,530 $ 6,558 $ 4,748
1. Certain prior year balances have been adjusted to conform with the current year presentation.
100
Operating Loss and Tax Credit Carryforwards at Dec 31
2021 2020
In millions
Assets Assets
Operating loss carryforwards
Expire within 5 years $ 240 $ 274
Expire after 5 years or indefinite expiration 817 1,031
Total operating loss carryforwards $ 1,057 $ 1,305
Tax credit carryforwards
Expire within 5 years $ 227 $ 434
Expire after 5 years or indefinite expiration 103 265
Total tax credit carryforwards $ 330 $ 699
Capital loss carryforwards
Expire within 5 years $ 397
$ —
Total tax loss and tax credit carryforwards $ 1,784 $ 2,004
101
NOTE 13 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows changes in the carrying amounts of goodwill by reportable segment for the years ended
December 31, 2021 and 2020:
Goodwill
Packaging &
Specialty
Plastics
Industrial
Intermediates &
Infrastructure
Performance
Materials &
Coatings Total
In millions
Balance at Jan 1, 2020 $ 5,109 $ 1,100 $ 2,587 $ 8,796
Foreign currency impact 12 4 106 122
Sale of rail infrastructure (2) — — (2)
Sale of marine and terminal infrastructure (4) (4) — (8)
Balance at Dec 31, 2020 $ 5,115 $ 1,100 $ 2,693 $ 8,908
Foreign currency impact (10) (4) (130) (144)
Balance at Dec 31, 2021 $ 5,105 $ 1,096 $ 2,563 $ 8,764
The separation from DowDuPont did not impact the composition of the Company's six reporting units: Coatings &
Performance Monomers, Consumer Solutions, Hydrocarbons & Energy, Industrial Solutions, Packaging and
Specialty Plastics and Polyurethanes & Construction Chemicals. The ECP businesses received as part of the
separation from DowDuPont are included in the Hydrocarbons & Energy and Packaging and Specialty Plastics
reporting units. At December 31, 2021, goodwill was carried by all reporting units except Coatings & Performance
Monomers (“C&PM”).
Goodwill Impairments
The carrying amounts of goodwill at December 31, 2021 and 2020 were net of accumulated impairments of
$309 million in Industrial Intermediates & Infrastructure and $2,530 million in Performance Materials & Coatings.
Goodwill Impairment Testing
The Company performs an impairment test of goodwill annually in the fourth quarter. In 2021, the Company
performed qualitative testing for all reporting units that carried goodwill. Based on the results of the qualitative
testing, the Company did not perform quantitative testing on any reporting units (one in 2020 and two in 2019). The
qualitative testing on the reporting units indicated that it was not more likely than not that fair value was less than
the carrying value for the reporting units.
The quantitative testing conducted in 2020 concluded that no goodwill impairments existed.
Upon completion of the quantitative testing in the fourth quarter of 2019, the Company determined the C&PM
reporting unit was impaired. During 2019, the C&PM reporting unit did not consistently meet expected financial
performance targets, primarily due to the industry’s increased captive use of coatings products, which led to volume
reductions; reduced margins for products across the portfolio due to changes in customer buying patterns and
supply and demand balances; as well as a continuous trend of customer consolidation in end-markets, which
reduced growth opportunities. As a result, the C&PM reporting unit lowered its future revenue and profitability
projections. The fair value of the C&PM reporting unit was determined using a discounted cash flow methodology
that reflected reductions in projected revenue growth rates due to lower sales volume and price assumptions, as
well as reductions to future growth rates. These discounted cash flows did not support the carrying value of the
C&PM reporting unit. As a result, the Company recorded a goodwill impairment charge of $1,039 million in the
fourth quarter of 2019, included in “Restructuring, goodwill impairment and asset related charges - net” in the
consolidated statements of income and related to the Performance Materials & Coatings segment. The carrying
value of the C&PM reporting unit's goodwill was zero at December 31, 2019. No other goodwill impairments were
identified as a result of the 2019 testing.
107
Other Intangible Assets
The following table provides information regarding the Company’s other intangible assets:
Other Intangible Assets at Dec 31
2021 2020
In millions
Gross
Carrying
Amount
Accum
Amort Net
Gross
Carrying
Amount
Accum
Amort Net
Intangible assets with finite lives:
Developed technology $ 2,637 $ (1,871) $ 766 $ 2,638 $ (1,677) $ 961
Software 1,396 (945) 451 1,489 (989) 500
Trademarks/tradenames 352 (344) 8 352 (343) 9
Customer-related 3,204 (1,565) 1,639 3,301 (1,419) 1,882
Total other intangible assets, finite lives $ 7,589 $ (4,725) $ 2,864 $ 7,780 $ (4,428) $ 3,352
In-process research and development 17 — 17 — — —
Total other intangible assets $ 7,606 $ (4,725) $ 2,881 $ 7,780 $ (4,428) $ 3,352
The following table provides information regarding amortization expense from continuing operations related to
intangible assets:
Amortization Expense from Continuing Operations
2021 2020 2019
In millions
Other intangible assets, excluding software $ 388 $ 401 $ 419
Software, included in "Cost of sales" $ 90 $ 96 $ 96
108
Accumulated Other Comprehensive Loss
The changes in each component of AOCL for the years ended December 31, 2021, 2020 and 2019 were as follows:
Accumulated Other Comprehensive Loss
2021 2020 2019
In millions
Unrealized Gains (Losses) on Investments
Beginning balance $ 104 $ 64 $ (51)
Unrealized gains (losses) on investments (21) 104 178
Tax (expense) benefit 5 (23) (38)
Net unrealized gains (losses) on investments (16) 81 140
(Gains) losses reclassified from AOCL to net income
1
(38) (54) (33)
Tax expense (benefit)
2
9 13 8
Net (gains) losses reclassified from AOCL to net income (29) (41) (25)
Other comprehensive income (loss), net of tax (45) 40 115
Ending balance $ 59 $ 104 $ 64
Cumulative Translation Adjustment
Beginning balance $ (930) $ (1,135) $ (1,813)
Gains (losses) on foreign currency translation (375) 227 59
Tax (expense) benefit (40) 25 (2)
Net gains (losses) on foreign currency translation (415) 252 57
(Gains) losses reclassified from AOCL to net income
3
(10) (47) (89)
Other comprehensive income (loss), net of tax (425) 205 (32)
Impact of common control transaction
4
— — 710
Ending balance $ (1,355) $ (930) $ (1,135)
Pension and Other Postretirement Benefits
Beginning balance $ (9,559) $ (8,781) $ (7,965)
Gains (losses) arising during the period 2,094 (1,769) (1,699)
Tax (expense) benefit (464) 411 413
Net gains (losses) arising during the period 1,630 (1,358) (1,286)
Amortization of net loss and prior service credits reclassified from AOCL to net income
5
776 753 504
Tax expense (benefit)
2
(181) (173) (117)
Net loss and prior service credits reclassified from AOCL to net income 595 580 387
Other comprehensive income (loss), net of tax 2,225 (778) (899)
Impact of common control transaction
4
— — 83
Ending balance $ (7,334) $ (9,559) $ (8,781)
Derivative Instruments
Beginning balance $ (470) $ (394) $ (56)
Gains (losses) on derivative instruments 155 (96) (470)
Tax (expense) benefit 3 (1) 101
Net gains (losses) on derivative instruments 158 (97) (369)
(Gains) losses reclassified from AOCL to net income
6
(38) 30 44
Tax expense (benefit)
2
3 (9) (13)
Net (gains) losses reclassified from AOCL to net income (35) 21 31
Other comprehensive income (loss), net of tax 123 (76) (338)
Ending balance $ (347) $ (470) $ (394)
Total AOCL ending balance $ (8,977) $ (10,855) $ (10,246)
1. Reclassified to "Net sales" and "Sundry income (expense) - net."
2. Reclassified to "Provision for income taxes on continuing operations."
3. Reclassified to "Sundry income (expense) - net."
4. Reclassified to "Retained earnings" as a result of the separation from DowDuPont on April 1, 2019. See Note 3 for additional information.
5. These AOCL components are included in the computation of net periodic benefit cost of the Company's defined benefit pension and other
postretirement benefit plans. See Note 20 for additional information.
6. Reclassified to "Cost of sales," "Sundry income (expense) - net" and "Interest expense and amortization of debt discount."
126
NOTE 21 – STOCK-BASED COMPENSATION
The Company provides stock-based compensation in the form of the Employee Stock Purchase Plan, which grants
eligible employees the right to purchase shares of the Company's common stock at a discounted price.
The Company also grants stock-based compensation to employees and non-employee directors under stock
incentive plans, in the form of stock options, stock appreciation rights, PSUs and RSUs.
I
135
I
The total stock-based compensation expense included in continuing operations in the consolidated statements
of income was $276 million, $171 million and $158 million in 2021, 2020 and 2019, respectively. The income
tax benefits related to stock-based compensation arrangements were $62 million, $39 million and $36 million in
2021, 2020 and 2019, respectively. Amounts disclosed throughout the remainder of this footnote are inclusive of
activity attributable to both continuing operations and discontinued operations, as the impact of discontinued
operations is not significant.
Accounting for Stock-Based Compensation
The Company grants stock-based compensation awards that vest over a specified period or upon employees
meeting certain performance and/or retirement eligibility criteria. The fair value of equity instruments issued
to employees is measured on the grant date. The fair value of equity and liability instruments is expensed over
the vesting period or, in the case of retirement, from the grant date to the date on which retirement eligibility
provisions have been met and additional service is no longer required. The Company estimates expected forfeitures
based on historical activity.
136
Stock Incentive Plan
Stock Options
The Company grants stock options to certain employees, subject to certain annual and individual limits, with
terms of the grants fixed at the grant date. The exercise price of each stock option equals the market price of the
common stock on the grant date. Options vest from one year to three years and have a maximum term of ten
years. The following table summarizes stock option activity for 2021:
Stock Options
2021
Shares in thousands
Shares
Exercise
Price
1
Outstanding at Jan 1, 2021
20,252 $ 47.44
Granted
1,309 $ 57.67
Exercised
(5,179) $ 39.97
Forfeited/Expired
(102) $ 60.36
Outstanding at Dec 31, 2021
16,280 $ 50.56
Remaining contractual life in years
4.65
Aggregate intrinsic value in millions
$ 141
Exercisable at Dec 31, 2021
13,106 $ 49.96
Remaining contractual life in years
3.75
Aggregate intrinsic value in millions
$ 128
1. Weighted-average per share.
Additional Information about Stock Options
In millions, except per share amounts
2021 2020 2019
Weighted-average fair value per share of options granted
$ 10.37 $ 5.89 $ 7.99
Total compensation expense for stock option plans
$ 14 $ 22 $ 23
Related tax benefit
$ 3 $ 5 $ 5
Total amount of cash received from the exercise of options
$ 217 $ 108 $ 93
Total intrinsic value of options exercised
1
$ 121 $ 41 $ 77
Related tax benefit
$ 27 $ 9 $ 17
1. Difference between the market price at exercise and the price paid by the employee to exercise the options.
Total unrecognized compensation cost related to unvested stock option awards of $5 million at December 31, 2021,
is expected to be recognized over a weighted-average period of 1.47 years.
137
Dow Inc. and Subsidiaries
The Dow Chemical Company and Subsidiaries
Valuation and Qualifying Accounts
Schedule II
(In millions) For the years ended Dec 31,
2021 2020 2019
Accounts Receivable - Allowance for Doubtful Receivables
Balance at beginning of year $ 51 $ 45 $ 42
Additions charged to expenses
1
16 22 24
Deductions from reserves
2
(13) (16) (21)
Balance at end of year $ 54 $ 51 $ 45
Inventory - Obsolescence Reserve
Balance at beginning of year $ 23 $ 35 $ 23
Additions charged to expenses 3 2 19
Deductions from reserves
3
(12) (14) (7)
Balance at end of year $ 14 $ 23 $ 35
Reserves for Other Investments and Noncurrent Receivables
Balance at beginning of year $ 2,093 $ 2,215 $ 460
Additions charged to expenses
1
19 7 1,758
Deductions from reserves
4
(79) (129) (3)
Balance at end of year $ 2,033 $ 2,093 $ 2,215
Deferred Tax Assets - Valuation Allowance
Balance at beginning of year $ 1,302 $ 1,262 $ 1,225
Additions charged to expenses 201 313 140
Deductions from reserves (112) (273) (103)
Balance at end of year $ 1,391 $ 1,302 $ 1,262
1. In 2019, additions charged to expenses for "Accounts Receivable - Allowance for Doubtful Receivables" included $2 million and additions
charged to expenses for "Reserves for Other Investments and Noncurrent Receivables" included $1,753 million related to the Company's
investment in Sadara Chemical Company ("Sadara"). See Note 12 to the Consolidated Financial Statements for additional information.
2. Deductions included write-offs, recoveries, currency translation adjustments and other miscellaneous items.
3. Deductions included disposals and currency translation adjustments.
4. Deductions from reserves for "Reserves for Other Investments and Noncurrent Receivables" included $77 million in 2021 and 2020 related to
the Company's investment in Sadara. See Note 12 to the Consolidated Financial Statements for additional information.
167
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 001-13175
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1828067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Valero Way
San Antonio, Texas 78249
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (210) 345-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock VLO New York Stock Exchange
Table of Contents
VALERO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions of dollars, except par value)
December 31,
2021 2020
ASSETS
Current assets:
Cash and cash equivalents $ 4,122 $ 3,313
Receivables, net 10,378 6,109
Inventories 6,265 6,038
Prepaid expenses and other 400 384
Total current assets 21,165 15,844
Property, plant, and equipment, at cost 49,072 46,967
Accumulated depreciation (18,225) (16,578)
Property, plant, and equipment, net 30,847 30,389
Deferred charges and other assets, net 5,876 5,541
Total assets
$ 57,888 $ 51,774
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and finance lease obligations $ 1,264 $ 723
Accounts payable 12,495 6,082
Accrued expenses 1,253 994
Taxes other than income taxes payable 1,461 1,372
Income taxes payable 378 112
Total current liabilities 16,851 9,283
Debt and finance lease obligations, less current portion 12,606 13,954
Deferred income tax liabilities 5,210 5,275
Other long-term liabilities 3,404 3,620
Commitments and contingencies
Equity:
Valero Energy Corporation stockholders’ equity:
Common stock, $0.01 par value; 1,200,000,000 shares authorized;
673,501,593 and 673,501,593 shares issued 7 7
Additional paid-in capital 6,827 6,814
Treasury stock, at cost;
264,305,955 and 265,096,171 common shares (15,677) (15,719)
Retained earnings 28,281 28,953
Accumulated other comprehensive loss (1,008) (1,254)
Total Valero Energy Corporation stockholders’ equity 18,430 18,801
Noncontrolling interests 1,387 841
Total equity 19,817 19,642
Total liabilities and equity
$ 57,888 $ 51,774
See Notes to Consolidated Financial Statements.
71
Table of Contents
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVENTORIES
Inventories consisted of the following (in millions):
December 31,
2021 2020
Refinery feedstocks $ 1,995 $ 1,979
Refined petroleum products and blendstocks 3,567 3,425
Renewable diesel feedstocks and products 135 50
Ethanol feedstocks and products 273 297
Materials and supplies 295 287
Inventories
$ 6,265 $ 6,038
We compare the market value of inventories to their cost on an aggregate basis, excluding materials and supplies. In determining the market
value of our inventories, we assume that feedstocks are converted into refined products, which requires us to make estimates regarding the
refined products expected to be produced from those feedstocks and the conversion costs required to convert those feedstocks into refined
products. We also estimate the usual and customary transportation costs required to move the inventory from our plants to the appropriate
points of sale. We then apply an estimated selling price to our inventories. If the aggregate market value is less than the aggregate cost, we
recognize a loss for the difference in our statements of income.
The market value of our LIFO inventories fell below their LIFO inventory carrying amounts as of March 31, 2020, and as a result, we
recorded an LCM inventory valuation reserve of $2.5 billion in order to state our inventories at market.
As of December 31, 2021 and 2020, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by
$5.2 billion and $1.3 billion, respectively.
86
Table of Contents
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. DEBT AND FINANCE LEASE OBLIGATIONS
Debt, at stated values, and finance lease obligations consisted of the following (in millions):
Final
Maturity
December 31,
2021 2020
Credit facilities:
Valero Revolver 2024 $ — $ —
Canadian Revolver 2022 — —
Accounts Receivable Sales Facility 2022 — —
364-Day Revolving Credit Facility 2021 — —
DGD Revolver 2024 100 —
DGD Loan Agreement 2022 25 —
IEnova Revolver 2028 679 598
Public debt:
Valero Senior Notes
6.625% 2037 1,500 1,500
3.400% 2026 1,250 1,250
2.850% 2025 1,050 1,050
4.000% 2029 1,000 1,000
3.650% 2051 950 —
4.350% 2028 750 750
7.5% 2032 750 750
4.90% 2045 650 650
2.150% 2027 600 600
2.800% 2031 500 —
3.65% 2025 324 600
8.75% 2030 200 200
1.200% 2024 169 925
10.500% 2039 113 250
7.45% 2097 100 100
6.75% 2037 24 24
2.700% 2023 — 850
Floating Rate Notes at 1.3665% 2023 — 575
VLP Senior Notes
4.500% 2028 500 500
4.375% 2026 376 500
Gulf Opportunity Zone Revenue Bonds, Series 2010, 4.00% 2040 300 300
Debenture, 7.65% 2026 100 100
Other debt 2023 26 31
Net unamortized debt issuance costs and other (86) (90)
Total debt 11,950 13,013
Finance lease obligations (see Note 6) 1,920 1,664
Total debt and finance lease obligations 13,870 14,677
Less: Current portion 1,264 723
Debt and finance lease obligations, less current portion
$ 12,606 $ 13,954
<<<------------------------------------------------------------>>>
Table of Contents
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Financial Instruments
Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the following table along with their
associated fair values (in millions):
December 31, 2021 December 31, 2020
Fair Value
Hierarchy
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Financial assets:
Cash and cash equivalents Level 1 $ 4,122 $ 4,122 $ 3,313 $ 3,313
Financial liabilities:
Debt (excluding finance leases) Level 2 11,950 13,668 13,013 15,103
134
Accounting Waiver Sample Final Exam - SOLUTION
Name _____________________________________________ _________
Accounting 6130
Sample Final Exam – Solution
• Please print your name in the space provided above
• The points allocated to each problem are noted at the bottom of this page and at the beginning
of each problem.
• You have three hours for the exam. Please budget your time carefully.
• The exam is open-book, open-notes.
•
The exam is to be done individually!
PROBLEM MAXIMUM SCORE
I. Accounts Receivable (Dow) 19
II. Long Term Assets (Dow) 21
III. Stockholders’ Equity (Dow) 25
IV. Income Taxes (Dow) 28
V. Inventory (Valero) 15
VI. Long Term Debt (Valero) 28
TOTAL 136
Accounting Waiver Sample Final Exam - SOLUTION
2
Question I (19 points) Accounts Receivable -- DOW
Refer to the excerpts from Dow’s financial statements. Assume a tax rate of 20% if necessary.
1. (3 pts) How much do customers owe to Dow at the end of 2021? Use the Trade Accounts
Receivable, not the “Other” Accounts Receivable. Also ignore Noncurrent Receivables.
From the Balance Sheet: Gross Receivables = Net Receivables + Allowance
= 6841 + 54 = 6895
2. (4 pts) What was the journal entry for Dow’s bad debt expense in 2021?
From Schedule II on p. 167, Bad Debt Expense = 16
Dr Bad Debt Expense 16
Cr Allowance for Doubtful Accounts 16
3. (3 pts) How much was Dow allowed to deduct on their income taxes related to bad debt /
writeoffs / customer defaults during 2021?
This is the writeoffs. Also from Schedule II on p. 166
Writeoffs = 13
Accounting Waiver Sample Final Exam - SOLUTION
3
4. (5 pts) Assume that Dow’s bad debt expense is contained in their Selling, General and
Administrative Expense line on the income statement. How much did Dow collect from
customers in 2021?
Cash Collected = Sales Revenue – BD Expense – Change in Net AR from the cash flow
statement
= 54,968 – 16 – 2,132 = 52,820
5. (4 pts) Suppose (hypothetically) that a large set of Dow’s customers went bankrupt, and Dow
had to write off $40 (in millions) in Accounts Receivable. How would this likely affect pre-
tax income (if at all)? I’m not looking for a numerical calculation – just explain your
reasoning.
There is no direct effect on income. The Journal Entry would be
Dr Allowance for Uncollectibles 40
Cr Accounts Receivable 40
However, this would bring the Allowance for Doubtful Accounts down from 54 to 14. This is
probably too small. To check this we would need to re-assess the credit-worthiness of the
remaining customers is to decide what the proper allowance should be for them. If we need to
increase the Allowance to get it an appropriate amount, we’d recognize that amount of extra
bad debt expense. For example, if we thought we needed to bring the Allowance from 14 up
to 20, we’d record
Dr Bad Debt Expense 6
Cr Allowance for Uncollectibles 6 (to bring it from 14 up to 20)
Accounting Waiver Sample Final Exam - SOLUTION
4
Question II. (21 Points) Long Term Assets -- DOW
Refer to the excerpts from Dow’s financial statements. If you need to assume a tax rate, use a
20% tax rate.
1. (2 pts) How much was Dow’s R&D Expense in 2021?
From the Income Statement, R&D Expense = 857
2. (5 pts) How much of Dow’s total “Depreciation and Amortization” is Depreciation?
From the Cash Flow Statement, Depreciation and Amortization = 2,842
From the Income Statement, Amortization of Intangibles = 388
Depreciation 2,454
They also mention there is 90 of Amortization of their software intangible in the cost of sales
line. If that was also part of what was added back in the Depreciation and Amortization line
(unlikely), we’d have to subtract that from the number above
3. (3 pts) How much Goodwill did Dow write down (impair) in 2019? (Note the year!)
From p. 97, the impairment in 2019 was 1,039
4. (4 pts) Dow’s Goodwill also went down in 2021. Was this also from impairment?
Explain.
No, from the Table in the Goodwill footnote on p. 107, this decrease came from change in foreign
currency exchange rates.
Accounting Waiver Sample Final Exam - SOLUTION
5
5. (3 pts) What is Dow’s largest identifiable intangible asset (not including goodwill) in
2021?
From the “Other Intangible Asset” table at the top of p. 108, the largest is “Customer-
related”
6. (4 pts) Accumulated Amortization for Dow’s “Software” intangible asset went DOWN,
not UP during 2021? How can this be?
New amortization expense should make the accumulated amortization balance go up.
But the balance will go down when you sell or retire an asset. At that point, you remove both
the original cost and any accumulated amortization associate with that asset.
For Dow’s software asset, the latter effect must have been the larger of the two for the
balance to go down.
Accounting Waiver Sample Final Exam - SOLUTION
6
Question III (25 points) Shareholders’ Equity -- DOW
Refer to the excerpts from Dow’s financial statements. If you need to assume a tax rate, use a
20% tax rate.
1. (2 pts) What is the par value per share of Dow’s common shares?
From the Balance sheet: par value = $0.01
2. (3 pts) How many common shares outstanding does Dow have at the END of 2021?
Shares Outstanding = Shares Issued – Treasury Shares
Shares Issued 764,226,882
Minus Treasury Shares 29,011,573
Shares Outstanding 735,215,309
3. (3 pts) What is the average price Dow has paid for the Treasury shares still listed on its
balance sheet at the end of 2021? (not how much did they pay IN 2021)
Be careful to get the numbers in a consistent order of magnitude
Avg price paid = Treasury stock balance 1,625 = $56.01
Number of Treasury Shares 29.011573
4. (2 pts) How much did Dow pay (in cash) in dividends to stockholders in 2021?
From the Cash Flow Statement
Cash Paid for Dividends = 2,073
Accounting Waiver Sample Final Exam - SOLUTION
7
5. (2 pts) What is the balance for Accumulated Other Comprehensive Income (AOCI) at the end
of 2021?
From the Balance sheet or the table in the footnotes on p. 126
Accumulated Other Comprehensive Income = (8,977) -- a loss
6. (3 pts) Which of these has had the biggest impact on AOCI through the end of 2021 (not
necessarily DURING 2021)? (Circle one)
• Unrealized Gains and Losses on Investments
• Cumulative Translation Adjustment (on foreign assets and liabilities)
• Pensions and Other Post Retirement Benefits
• Derivatives
7. (2 pts) How much in stock-based compensation expense did Dow recognize during 2021?
From the footnotes, p. 136
Stock compensation expense = 276
8. (3 pts) How many exercisable options does Dow have at the end of 2021?
From the footnotes, p. 137
Stock Options Exercisable =13,106
Accounting Waiver Sample Final Exam - SOLUTION
8
9. (5 pts) Suppose Dow grants employees new options this year (e.g., Year 1) with an exercise
price equal the market price at the date of grant. The options have a three-year vesting period.
During Year 2, Dow’s stock price goes up. Explain TWO reasons why these options lower
Dow’s DILUTED Earnings Per Share in Year 2. (no numerical calculations are needed)
The options are valued at the date of the grant, and this value is spread over the vesting period.
So there is an expense in year 2 associated with these options, and this decreases the numerator
of earnings per share.
Moreover, when the options move “into the money,” they are considered dilutive and the
increase the denominator of the diluted EPS calculation.
Accounting Waiver Sample Final Exam - SOLUTION
9
Question IV (28 points) Income Taxes -- DOW
Refer to the excerpts from Dow’s financial statements. If you need to assume a tax rate, use a
20% tax rate. (Of course, if you’re asked to calculate a tax rate, 20% is probably not the right
answer for this question).
1. (2 pts) How much is DOW’s income tax expense (on continuing operations) in year
2021? (You do not need to separately provide Federal, State and Foreign tax expenses, just the
total). Be sure to indicate if this is an expense or a benefit.
From Income Statement, Income Tax Expense = $1,740 (this is an expense)
2. (2 pts) How much is DOW’s Current Portion of their Income Tax Expense in 2021?
(You do not need to separately provide Federal, State and Foreign components of this, just the
total). Be sure to indicate if this is an expense or a benefit.
From Tax footnote, p. 99 Current Portion = $1,462 (also an expense)
3. (3 pts) What was Dow’s effective tax rate in 2021?
Effective Tax Rate = Income Tax Expense = 1,740 = 21.4%
Pre-tax Book Income 8,145
This is already calculated in the Income Tax Footnote, p. 100
4. (5 pts) Calculate Dow’s “cash effective tax rate” in 2021. This is the ratio of “cash taxes
paid” to Pre-tax Book Income. (this is what the new tax bill will look at to establish a
minimum tax).
We can get cash taxes paid from the “footnote” to the cash flow statement. It’s at the top of p.
99
Cash effective tax rate = Cash Taxes Paid = 731 = 8.97%
Pre-tax Book Income 8,145
Accounting Waiver Sample Final Exam - SOLUTION
10
5. (4 pts) Did Dow face a higher or lower tax rate on its foreign income relative to its US federal
rate of 21% in 2021? Explain.
The easiest way to answer this is look at the Reconciliation of the Effective tax rate to the
US Federal Statutory rate. There is a line called “foreign income taxed at rates other than
the US Federal rate,” and the number is negative; it’s (1.3). Technically, what this is says
that the income tax rate on foreign profits has the effect of lowering the overall effective
tax rate by 1.3% (relative to the statutory rate of 21%). This was an acceptable answer.
If you also noted that the next line says “US Tax Effect of foreign income and dividends”
and then add this positive 1.7 to the (1.3) number above, the overall effect of both
adjustments was positive, that was also acceptable (and better!)
6. (4 pts) What is the biggest reason why Dow’s effective tax rate is so much HIGHER than
the US Federal rate in 2020? (NOTE THE YEAR!) Give me the “line item” and explain why
this increases Dow’s effective tax rate
The line item “Valuation Allowance” caused the effective tax rate to go up by 12.6% relative
to the US Federal rate.
This is because Dow increased their Valuation Allowance. This is an indicator that Dow does
not expect to recover as much of their Deferred Tax Assets as they thought at the beginning of
the year.
The journal entry would be
Dr Income tax expense x
Cr Valuation Allowance x
Accounting Waiver Sample Final Exam - SOLUTION
11
7. (4 pts) Dow’s pre-tax book income is negative in 2019 (note the year). Do you think the
income they reported to taxing authorities in 2019 was negative? Explain.
No …
Note that book income for 2019 includes a large impairment charge for goodwill and a large
writedown of their equity investment in a company called Sadara. Some of that was not tax
deductible
Also note that the current portion of income tax expense in 2019 was positive.
Also note that cash taxes paid for 2019 was positive
8. (4 pts) How much of Dow’s Tax Operating Loss Carryforwards expire more than 5 years
from now? Give me a dollar amount. Does Dow’s calculation of this Deferred Tax Asset
reflect the time value of money? Explain.
From p. 101
Tax Operating Loss Carryforwards Expiring After 5 years 817
Deferred Tax assets don’t consider the time value of money. They only look at when the timing
difference will reverse and what the tax rate will be at that time.
Accounting Waiver Sample Final Exam - SOLUTION
12
V. Inventory (15 points) - VALERO
Refer to the excerpts from Valero Corporation’s financial statements. Valero is an Oil and Gas
Company. Assume a 20% tax rate if necessary.
1. (3 pts) How much is Valero’s LIFO Reserve at the end of 2021? (give me a number)
From the inventory footnote on p. 86, LIFO Reserve = 5.2 (billion)
2. (4 pts) Valero’s pre-tax income in 2021 was $1,543 (in millions). What would their pre-
tax income have been in 2021 had they always been using FIFO for their inventory valuation?
(give me a number)
Change in LIFO Reserve = 5.2 – 1.3 = 3.9 billion
FIFO pre-tax income (in millions) = LIFO Income + Change in LIFO Reserve
= 1,543 + 3,900 = $5,443
A HUGE DIFFERENCE!
3. (4 pts) How much has Valero saved in taxes cumulatively through the end of 2021 through
the use of LIFO? (assume a 20% tax rate has always applied)
Cumulative Tax Savings = LIFO Reserve x tax rate
= 5.2 x .2 = $1.04
Accounting Waiver Sample Final Exam - SOLUTION
13
4. (4 pts) Valero’s footnotes report that in 2020 they experienced a Lower of Cost or Market
Adjustment. This is essentially a write-down of inventory. Explain why Inventory write
downs are less common for firms that use LIFO compared to firms that use FIFO.
Firms have to write down inventory if the current market value falls below the amount the
inventory is being carried at on the books.
LIFO has old costs in inventory. When costs have been increasing (which is often the
case), these old cost are low costs. Therefore, the market value has to fall below these old
costs before a writedown is necessary.
On the other hand, under FIFO, the newer costs are in inventory. Market prices do not
have drop much to fall below these more recent costs.
Accounting Waiver Sample Final Exam - SOLUTION
14
Question VI (28 points) Long Term Debt -- VALERO
Refer to the excerpts from Valero’s financial statements. Valero is an Oil and Gas company. If
you need to assume a tax rate, use a 20% tax rate.
1. (3 pts) How much in LEASES are included in Valero’s Debt line of the balance sheet at the
end of 2021? (give me a dollar number)
Near the bottom of the Debt Footnote
Finance Lease Obligations: 1,920
(this is more than 10% of their total debt)
2. (4 pts) If debt was issued at a discount, which of the following is true (Circle one)
• Interest Expense is smaller than Coupon Payment
• Interest Expense is equal to the Coupon Payment
• Interest Expense is greater than the Coupon Payment
The extra interest expense increases the liability balance (or reduces the discount). The
book value of the liability increases over time, and it eventually approaches the face
value.
3. (3 pts) What is the fair value of Valero’s debt (excluding leases) at the end of 2021? (give me a
dollar number)
From the last page, Fair Value of debt (excluding leases) 13,668
Note that this is bigger than the book value of debt (excluding leases) of 11,950
4. (4 pts) Based on the comparison of Valero’s book value and fair value of their debt (excluding
leases), what has happened to market interest rates, on average, since their debt was issued?
(Circle one)
• Interest Rates Went Down
• Interest Rates Have Stayed the Same
• Interest Rates Went Up
The fair value of the debt is the present value of the remaining cash flows, discounted
back at the current market rate of interest. The book value of the debt is the present
value of the remaining cash flows, discounted back at the historical market rate of
interest. If the fair value is higher, the current discount rate has to be lower.
Accounting Waiver Sample Final Exam - SOLUTION
15
5. (14 pts) Consider Valero’s 4% Senior Notes due in 2029. For convenience, assume that the
interest payments are due on June 30 and December 31. Therefore, this debt is due exactly 8
years (or 16 semi-annual periods) from the date of the financial statements. Suppose market
interest rates jumped to 10% at the end of December 31, 2021 (remember that we have to use
semi-annual compounding).
a. (4 pts) What is the semi-annual coupon payment that Valero makes on this debt?
Coupon payment = face value x coupon rate / 2 = 1,000 x .04 / 2 = 20
b. (3 pts) What is the (updated) present value of the stream of coupon payments
Valero will be making on this debt (as assessed on December 31, 2021 – the date
the interest rates jumped up)?
This is the present value of 16 more coupon payments of $20, discounted back at
the market rate of interest, which is 10%/2 = 5%
-PV (.05, 16, 20) = $216.76
c. (3 pts) What is the market value of this debt (on December 31, 2021)?
Now we have to add the market value of the face value. The PV is 1000
discounted back 16 periods at 5%, which is
PV of Coupon Payments 216.76
PV of Face Value 458.11
Total Value $674.87
d. (4 pts) What effect does this spike in interest rates have on the book value of this
Senior Note? (circle one)
• Decreases the Book Value
• Has No Effect on the Book Value
• Increases the Book Value
Under historical cost accounting (which is what Dow is using), the book values ignore
subsequent changes in market rates