Worlcom Case for Financial Statement Analysis

ACFI 593

Case #2 WorldCom

1. I don’t agree. Analysts shouldn’t rely solely on the financial statements. For WorldCom, sales and earnings appear good, operating cash flows are positive and exceed cash being spent for capacity expansion, and the balance sheet remains healthy. However, to make informed decisions, analysts should analyze various industries, specific companies’ products or services that they sell. By reading the financial statement, you would know that WorldCom, had to make the same rental payments every month, but they have less traffic through the network which means less revenue and an increase in line costs which should show lower profits, however, WorldCom line costs haven’t increased. Wouldn’t a question rise from this information?

2. The company reported $14,739 in line costs for the year ended December 31, 2001. These line costs are WorldCom’s major operating expenses which represents fees that WorldCom paid to third party to complete calls. These fees should be expensed out in the year as an operating expense. Per GAAP and IFRS these charges should not be capitalized.

3. WorldCom improperly capitalized access charges and transport charges. Mr. Sullivan capitalized a portion of leasing the lines (access charges) since it wasn’t generating any revenues. These line costs were given rise from the contracts that WorldCom had with third parties to complete the call of the company’s customers. WorldCom had signed multibillion dollar contracts with third parties by early 2001 in which 15% of the costs weren’t producing revenue because the company had too much capacity, in which management decided to capitalize and amortize over the periods in the future. These costs do not meet the definition of assets accordingly to FASB Concepts No. 6. Per FASB No. 6” Assets are defined as, both tangible and intangible, resources from which a person or entity can gain economics benefits in future or they can be termed as economic resources of the business....