Ford Motor Company and Toyota Motor Corporation: Acquisition and Inventory Cycle

Issues
1. What are the key acquisition and inventory cycle accounts for Ford?
The key acquisition and inventory cycle accounts of Ford are the automotive cost of sales,
inventories, and payables.
What are the critical accounting policies for these accounts?
These raw material arrangements, took place independently of any purchase orders being issued
by Ford to their suppliers and are negotiated at arms length. The risk and rewards of the
ownership is passed to the suppliers and when it does, the company will record both the cost of
raw materials and the income from the subsequent sale of the automotive cost of sale. While
when the risk and reward retains to the company, they account for the raw materials as inventory
on the balance sheet.
2. Compare Ford and Toyotas footnotes on inventory. Calculate the percentage of finished
products that each company holds in inventory. What inferences do you draw from that
analysis? How could this ratio be used to understand slow-moving inventory by, for
example, geographic region or product line?
Ford: 6861/10121= 0.677897441
Toyota: 10203/15281= 0.667691905
The ratio is approximately the same, representing that the finished goods as a percentage of total
inventory is very similar between Ford and Toyota. With Fords financial problems, the ratio is
probably good news in the sense that it indicates that the overall company level of finished goods
is not inactive compared to Toyotas.
3a. Use the financial ratios provided in an earlier chapter appendix for Ford and Toyota.
What are the ratios most relevant to the acquisition and inventory cycle?
The ratios that can be use in the acquisition and inventory cycle would probably the quick ratio,
current ratio, margins(i.e., gross margin, EBITD margin, operating margin, pre-tax margin, net
profit margin), inventory turnover, days sales in inventory, and asset turnover.
3b. What additional ratios or comparisons can you develop that would help you understand
this transaction cycle for these automotive companies?
Some ratios or comparisons that can be helpful in the transaction cycle of the automotive
companies would include

Tracking inventory over time, by geographic location, and by product type.

Tracking cost increases by product line to inventory costing variation that should occur as
a result of those cost increase.

Determining whether factory overhead allocations are appropriate, accurate, and in-line
with expectations.

Evaluating managements actions to investigate variances.

4a. Read Fords Management Discussion and Analysis section that relating to automotive
market and counterparty risk. What is commodity price risk? How does Ford manage that
risk?
Commodity price risk is the possibility that Fords financial results could be better or worse than
planned because of changes in the prices of commodities used in the production of motor
vehicles. The two largest commodity exposures for Ford would be the commodity prices for steel
and resins. Ford uses derivative instruments to hedge commodity price risk.
4b. What is counterparty risk? How does Ford manage that risk?
Counterparty risk is the loss a company would incur if its counterparty defaulted on a
derivative contract. Ford is able to manage such risk by launching exposure limits for each
counterparty to reduce risk and provide counterparty diversification. Ford also enters into
agreements with counterparties that allow netting of exposures to manage counterparty risk.
4c. As an auditor, what is your obligation regarding the statements that management makes
in its management discussion and analysis?
As an auditor, one of its obligations is to read the management discussion and analysis section of
the 10-K, but the audit report does not attest to the accuracy of the statements made by
management as part of the normal audit engagement. If the auditor becomes aware that there is
some inaccuracies happening in the management discussion and analysis section, they are
obligated to urge the client to correct the inaccuracies. If management refused to correct an
inaccuracy, the auditor is obligated to discuss the matter with the audit committee.