1.

Do you agree with the conclusion that a meaningful amount of Fords earning improvement over the past three quarters come from accounting adjustments, as opposed to real improvements in the companys underlying profitability? Yes, I agree that a meaningful amount of Fords earning improvement over the past three quarters come from accounting adjustments, as opposed to real improvements in the companys underlying profitability. Change in accounting principle are allowed only if Required by new GAAP
Use of alternative accounting principle can be justified to be preferable.

The company adopted FIN46 for variable interest entities formed prior to Feb 1 2003. As a consequence the company consolidated several VIEs in the financial statement and recognized a cumulative effect of change in accounting principle of 264 million.

2003 Cumulative Effect of change in accounting principle. -264

2002 -1002

Previously companys profit underlie in provision for credit and losses.

Provision for credit and insurance losses Percentage of sales

2003 1802 1.83%

2002 2523 2.53%

Here it is clearly depicted that 2.53 % of profit lies in the provision for credit and insurance losses. In the preceding year it was reduced up to 1.83%. We can assume that the company would not adopt the new accounting principle then what is the impact on overall profitability in 2002 Income / loss from continuing operations Income / ( loss ) from discontinued / held for sale operations Loss on disposal of continued / held for sale operations Profit $295 $48 $95 $152 Here the profit in 2002 without changing the accounting principle was $ 152. Total cost and expenses without adopting FIN6 = 120640

That is the almost 99.69 % of the sales. In the coming year 2003 the company adopted FIN 6 and that is the change in accounting principle and now we see the effect; Income / loss from continuing operations Income / ( loss ) from discontinued / held for sale operations Loss on disposal of continued / held for sale operations Cumulative effect of change in accounting principle Profit $1561 $4 $5 $264 $1288

Here we see that by changing accounting principle the company gain the profit by $ 1136 The most important thing was happen that the total cost and expenses account 98.31 of sales figure . So, that is the reason the company change accounting adjustment and so we agree with the conclusion.

2. What adjustments, if any, would you make to the 2003 first nine moth earning to determine if 2003 nine month earnings did or did not represent a real improvement?

As we already discussed the change in accounting principle represent a real improvement where we should make adjustment by seeing the profit and loss account statement:

Sales and revenue Automotive sales Financial services Total sales and revenue Automotive interest income Cost and expenses Cost of sales Selling administrative and other expenses Interest expense Provision for credit and insurance losses

98719 19727 118446 727

91205 18027 5709 1802

Total Cost and expenses automotive equity in net income / loss of affiliated companies Income loss before income taxes Provision for/ benefit from income taxes Income loss before minority interest Minority interest in income loss of subsidaries Income / loss from continuing operations Income / ( loss ) from discontinued / held for sale operations Loss on disposal of continued / held for sale operations Cumulative effect of change in accounting principle Profit

116743

48 2478 245 1561 4 5 264 1288

In the all the mentioned items only the adjustment is possible in provision for credit and insurance losses. That is already reduced by 28.57 %. And we can make the adjustment in fixed expenses like depreciation on fixed assets. The adjustment can be made with retrospective method. if the change of method has been made from a previous date , the amount of depreciation is adjusted during the current year . If we shift to diminishing balance with retrospective effect excess depreciation charged previously will be credited to profit and loss account. In the same way, if we shift from diminishing in straight line method , the excess depreciation to be charged will be debited to profit and loss account . These are the two items where we will make adjustment whether nine month earnings did or did not represent a real improvement. 3. Do you agree with Ford s measurement and assessment of the value of investors of 1) its automotive segments total operating related cash flows 2) Ford Credits managed debt to equity ratio 3) total companys fixed charges ratios ? Why? Yes, I agree with Fords measurement and assessment of the value of investors and these are the reasons for the importance of ratios 1. Its automotive segment s total operating cash flows : Measuring the cash inflows and outflows caused by core business operations, the operations component of cash flow reflects how much cash is generated from a company's products or services. Generally, changes made in cash, accounts receivable, depreciation, inventory and accounts payable are reflected in cash from operations. A company can use a cash flow statement to predict future cash flow, which helps with matters in budgeting. For investors, the cash flow reflects a company's financial health:

basically, the more cash available for business operations, the better. However, this is not a hard and fast rule. Sometimes a negative cash flow results from a company's growth strategy in the form of expanding its operations. By adjusting earnings, revenues, assets and liabilities, the investor can get a very clear picture of what some people consider the most important aspect of a company: how much cash it generates and, particularly, how much of that cash stems from core operations. 2. Ford Credits managed debt to equity ratio High debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.

3. Total companys fixed charges ratios: Fixed charge coverage ratio signifies the firms ability to pay fixed charges. The higher is the ratio the more capable is the firm to pay. The four types of fixed financial charges; a) Interest on debt b) Principal repayment on debt c) Lease payment d) Preferred share dividend payments The lower the ratio the higher the risk to lenders and shareholders as the firm will have trouble to pay fixed charges. 4. Do you agree or disagree with Standard & Poors 2003 down grades of Fords long term credit rating? Why Long-term issue credit ratings Issue credit ratings are based, in varying degrees, on the following considerations: 1. Likelihood of payment - capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; 2. Nature of and provisions of the obligation; 3. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.

Current ratio

Current assets Current liabilities PBDIT Interest and Finance charges PBDIT- tax Repayment of long term loans+int on long term and short term

0.950876

Interest coverage

1.324

Debt service coverage ratio

0.017727

From these ratios we can interpret the firms capacity to meet debt. These are the ratios calculated for the Ford motor company for the year 2003. Current ratio is below 1. So, it can easily interpret that firm have trouble to meet their current liability immediately. Debt service coverage ratio is below 1 it clearly signifies that firm is unable to meet their debt in near future. So, we agree with the standard and poors down grade credit rating by interpretation of these ratios.