Blue Tower at Year-End: A Comprehensive Case

Question 1. A corporate vice president replies to the packet: “Revenue went up in 2027, so the company clearly performed better than in 2026.” Using Exhibit 1, which response should Renee give? (Select one. 1 point.)

• a.Agree. Revenue rose $40 million, and because most hotel costs stay the same when revenue grows, the added revenue flowed through to profit, making 2027 the stronger year.
  Misconception: Revenue growth guarantees profit growth. Exhibit 1A shows the opposite. Operating expenses before depreciation rose $43 million, more than the $40 million increase in revenue, and net income fell from $36 million to $32 million. Revenue growth does not guarantee profit growth; you have to look at expenses too.
• b.Agree. Cash rose from $40 million to $65 million during 2027, and that increase confirms that the company earned more in 2027 than it did in 2026.
  Misconception: A larger cash balance proves higher net income. Cash and net income measure different things. Net income fell from $36 million to $32 million. Exhibit 1C shows that much of the cash came from borrowing, not earnings, so a larger cash balance does not prove higher income.
• c.Revenue rose $40 million, but operating expenses before depreciation rose $43 million and depreciation rose $2 million. Net income fell from $36 million to $32 million, so higher revenue alone does not show stronger profitability.
  Keyed answer. Correct. Revenue increased $40 million, but operating expenses before depreciation increased $43 million and depreciation increased $2 million, so operating income fell $5 million. Interest expense was unchanged, and income tax expense fell $1 million, so net income fell $4 million, from $36 million to $32 million. Revenue is one input to performance, not the result. (The renovated Blue Tower produced no 2027 revenue; it reopened on January 1, 2028.)
• d.Disagree. Net income fell even though revenue rose, which cannot happen in correctly prepared statements, so corporate should ask the Controller to find and correct the error in the income statement.
  Misconception: Lower net income despite higher revenue means the statements contain an error. Net income falls while revenue rises whenever expenses grow faster than revenue, which is what happened in 2027. The statements are correct; the decline is a result to explain, not an error to fix.

Question 2. Exhibit 2A shows $9 million that two groups of guests paid in advance during December. The statements in Exhibit 1 already apply the correct treatment. How much of the $9 million belongs in 2027 revenue, and how much is still a customer deposit liability at December 31, 2027? (Select one. 1 point.)

• a.Revenue for 2027: $6 million; customer deposit liability: $3 million
  Keyed answer. Correct. Revenue is recognized when Burburr provides the service, not when the guest pays. Priya said the guests who came in December received everything they paid for by December 31, so that $6 million is 2027 revenue. The Blue Tower guests paid for January stays that had not happened at year-end, so Burburr still owes them $3 million of service: a liability.
• b.Revenue for 2027: $9 million; customer deposit liability: $0
  Misconception: Collecting cash is the same as earning revenue. This treats collecting cash as earning revenue. The Blue Tower guests paid in December, but their stays are in January, after the reporting date. Until Burburr provides the stays, the $3 million is owed to the guests as service, so it is a liability, not 2027 revenue.
• c.Revenue for 2027: $0; customer deposit liability: $9 million
  Misconception: Every advance payment stays unearned at year-end. Priya said the December guests received everything they paid for by December 31. Once Burburr provided those services, it had earned the $6 million, even though the guests paid in advance. Only the $3 million for January Blue Tower stays is still owed.
• d.Revenue for 2027: $3 million; customer deposit liability: $6 million
  Misconception: Reversing which group’s services were provided. This reverses the two groups. The holiday event packages ($6 million) were delivered in December and are earned. The Blue Tower reservations ($3 million) are for January stays, which had not been provided at December 31.

Question 3. Priya described how one reservations supervisor both approves guest refunds and reconciles the reservation collection and refund records to the bank activity. No loss or error has been found. Which change would most effectively strengthen control over reservation refunds? (Select one. 1 point.)

• a.Have the same supervisor reconcile the collection and refund records to the bank activity every week instead of every month, so that any problem is found sooner.
  Misconception: Checking more often fixes a missing separation of duties. Reconciling more often does not fix the problem, because the person reconciling is the person who approved the refunds. An improper refund could still be hidden in the reconciliation. The fix is to separate the duties, not to repeat them more often.
• b.Have the supervisor also record the refunds, in addition to approving them and reconciling the records, so one experienced person manages the whole process consistently.
  Misconception: Concentrating duties in one trusted person strengthens control. This combines authorization, recording, and checking in one person instead of separating them, which increases the risk that an improper refund goes undetected.
• c.Make no change for now. Cash rose to $65 million and no loss has been found, so an improper refund would be small compared with the company’s cash.
  Misconception: A large cash balance makes internal control unnecessary. Internal control is about the risk that errors or improper payments go undetected, not about whether the company can afford a loss. A larger cash balance does nothing to reduce that risk. The weakness does not prove fraud, but it should still be fixed.
• d.Assign the reconciliation, or a documented independent review of it, to someone who neither approves nor records refunds and does not handle the related cash.
  Keyed answer. Correct. The weakness is that the person who can approve a refund also checks the records that would reveal an improper one. A reconciliation or documented review by someone with no refund, recording, or cash duties separates authorization from checking and reduces the risk that errors or improper refunds go undetected. The reviewer should check refund approvals and supporting records as well as agreement with bank activity. This does not imply that anyone has acted improperly.

Question 4. Exhibit 3 shows Burburr’s receivables at December 31, 2027, grouped by age, with the loss rates accounting used. The balance sheet reports accounts receivable, net, of $60 million from a gross balance of $64 million. Which explanation best supports the $60 million? (Select one. 1 point.)

• a.Because $50 million of the receivables is not yet past due, a single 1% loss rate applied to all $64 million is the best estimate. That supports net receivables of $63.36 million.
  Misconception: One low loss rate fits every account, whatever its age. A single 1% rate ignores what the aging shows: older balances are much less likely to be collected; Marcus said the longer a balance goes unpaid, the less of it Burburr expects to collect. One low rate understates expected losses ($0.64 million instead of $4 million) and overstates the cash Burburr can expect.
• b.Applying each age group’s loss rate gives estimated losses of $4 million, so $60 million is the amount Burburr expects to collect. Some past-due balances are still expected to be collected.
  Keyed answer. Correct. Estimated losses are ($50 × 1%) + ($8 × 5%) + ($4 × 40%) + ($2 × 75%) = 0.50 + 0.40 + 1.60 + 1.50 = $4 million. The allowance already recorded matches this aging estimate, so the balance sheet reports the $60 million Burburr expects to collect. It is an estimate across the whole pool: it does not say which customers will fail to pay or exactly when cash will arrive, and net receivables are not cash already collected.
• c.Every past-due account, $14 million in all, should be treated as uncollectible because it was not paid on time. That supports net receivables of $50 million.
  Misconception: A past-due balance is automatically worthless. Marcus said a past-due balance is not automatically worthless. The aging gives every past-due group a loss rate below 100%, so treating all $14 million as lost would understate what Burburr expects to collect.
• d.No loss should be recorded until a specific customer fails to pay, so receivables should be reported at the full $64 million until a default occurs.
  Misconception: Wait for a customer to default before recognizing any loss. Waiting for a default ignores losses that are already expected at year-end. The allowance method estimates uncollectible amounts now, so receivables are reported at the amount expected to be collected. Burburr has already recorded that estimate.

Question 5. Exhibit 4 shows Burburr’s food, beverage, and merchandise inventory. Burburr purchased $98 million of inventory during 2027. Which statement correctly explains how inventory affects the 2027 statements? (Select one. 1 point.)

• a.Operating expenses include $98 million of inventory cost, because the cost of goods used or sold during a year equals the amount purchased that year.
  Misconception: Purchases equal the cost of goods used or sold. Purchases equal the cost used or sold only when inventory does not change. Inventory rose from $12 million to $15 million, so not everything purchased was used: $95 million was used or sold, and the rest added to inventory.
• b.Operating expenses include $95 million of inventory cost for the goods used or sold, and the $15 million still on hand at December 31 is reported as an asset.
  Keyed answer. Correct. Cost used or sold = beginning inventory + purchases − ending inventory = 12 + 98 − 15 = $95 million. That cost is a 2027 expense; the $15 million on hand is an asset that becomes an expense when it is used or sold. Purchases, expense, and payments to suppliers do not have to be equal in any one year.
• c.Operating expenses include $110 million of inventory cost, because all inventory available during the year, beginning inventory plus purchases, was used or sold.
  Misconception: Everything available for sale was used or sold. Not everything available was used: $15 million was still on hand at December 31 and is reported as an asset. Subtract ending inventory: 12 + 98 − 15 = $95 million.
• d.Operating expenses include $83 million of inventory cost, because the $15 million of ending inventory is subtracted from the $98 million purchased.
  Misconception: Beginning inventory is left out of the cost calculation. This leaves out the $12 million of beginning inventory, which was also available to use during 2027. Cost used or sold = 12 + 98 − 15 = $95 million.

Question 6. Use Exhibit 5 and Tom’s video. Which description correctly reports the Blue Tower renovation and the routine repairs in 2027? (Select one. 1 point.)

• a.Both the $150 million renovation and the $6 million of routine repairs are 2027 operating expenses, because both were paid in cash during 2027.
  Misconception: Every cash payment is an expense of the year paid. Paying cash in 2027 does not make a cost a 2027 expense. The renovation will serve guests for many years, so its cost is an asset that is expensed through depreciation beginning when the improvements are available for their intended use. Had it been expensed, 2027 would have shown a large loss instead of net income of $32 million.
• b.Both the renovation and the routine repairs are reported as property and as investing cash outflows, because both were spent on the company’s buildings.
  Misconception: Every payment for buildings is an asset. Tom said the routine repairs keep the other facilities running the way they were; they do not make them any better. That makes them an expense of the year, not an addition to property.
• c.The renovation is a financing cash outflow because the company borrowed to help pay for it, and the routine repairs are a 2027 operating expense.
  Misconception: The source of the money decides the cash flow category. The cash flow category depends on what the cash was used for, not where it came from. Paying for long-term property is an investing activity. The borrowing itself is reported separately as a financing inflow.
• d.The renovation is reported as property (construction in progress) and an investing cash outflow; the routine repairs are a 2027 operating expense and an operating cash outflow.
  Keyed answer. Correct. Tom said guests will be using the renovation for many years, so its $150 million cost is an asset (construction in progress until the tower is ready for use) and an investing cash outflow, as Exhibit 1C shows. The repairs only kept other buildings in their existing condition, so they are a 2027 expense, and the cash paid for them is an operating cash outflow. Paying cash this year does not make the renovation a 2027 expense.

Question 7. The renovation cost $150 million, was paid for by December 31, 2027, and was first available for use on January 1, 2028. Exhibit 5 gives straight-line depreciation, a 15-year useful life, and zero residual value. How much depreciation on the renovation belongs in 2027, and how much in a full 2028? (Select one. 1 point.)

• a.2027: $0; 2028: $10 million
  Keyed answer. Correct. Depreciation begins when an asset is available for its intended use. The tower was not ready for guests until January 1, 2028, so there is no renovation depreciation in 2027; the $30 million of 2027 depreciation is for property already in use. A full 2028: $150 million ÷ 15 years = $10 million. Depreciation spreads the cost over the years the tower is used; it is not a cash reserve or a market value.
• b.2027: $10 million; 2028: $10 million
  Misconception: Depreciation starts when the asset is paid for. Depreciation starts when the asset is available for use, not when it is paid for. The renovation was not ready until January 1, 2028, so none of its cost is depreciated in 2027.
• c.2027: $150 million; 2028: $0
  Misconception: A long-term asset is expensed when the cash is paid. The renovation is a long-term asset, not a 2027 expense. Its cost is spread over the 15 years it is expected to serve guests, starting when it is available for use.
• d.2027: $0; 2028: $0
  Misconception: An asset that is already paid for needs no depreciation. Paying for an asset does not remove the need to depreciate it. Depreciation allocates the cost over the years the asset is used, beginning January 1, 2028.

Question 8. Exhibit 6A shows Burburr’s 2027 payroll. Employees earned the final payroll of the year before December 31, and Burburr will pay it in January 2028. Which report is correct? (Select one. 1 point.)

• a.Wage expense of $178 million, the amount paid during 2027; the final payroll becomes an expense in January, when employees are paid.
  Misconception: Wage expense follows the payment (cash basis). This uses the cash basis. Under accrual accounting, wages are an expense when employees earn them, not when they are paid. The final payroll was earned in 2027, so it is a 2027 expense and a liability at year-end.
• b.Wage expense of $174 million and no wages payable; the final $6 million payroll is paid in January, so it belongs entirely to 2028.
  Misconception: An accrued expense paid next year belongs to next year. The final payroll was earned in 2027, so it belongs in 2027 expense even though it will be paid in January. Removing it understates both expense and liabilities. The prepared statements already treat it correctly.
• c.Wage expense of $180 million and wages payable of $6 million; employees earned the wages in 2027, and Burburr paid $178 million of wages in cash during 2027.
  Keyed answer. Correct. Wages are an expense in the period employees earn them. The statements already include the final payroll in 2027 wage expense ($180 million) and report it as wages payable ($6 million) because it is unpaid. Cash paid = beginning payable + expense − ending payable = 4 + 180 − 6 = $178 million.
• d.Wage expense of $186 million and wages payable of $12 million, because the unpaid $6 million final payroll must still be added to the reported amounts.
  Misconception: Adding an accrual that the statements already include (double counting). The prepared statements already include the final payroll: it is part of the $180 million of wage expense and the $6 million of wages payable. Adding it again would count the same wages twice.

Question 9. Use Exhibit 6B and Marcus’s video. Which explanation correctly connects the new note, the classification of notes payable, and the payments due in 2028? (Select one. 1 point.)

• a.The $160 million received on December 31 is a financing inflow, not revenue. The $28 million of principal due in 2028 is a current liability. In 2028, the new note’s $8 million installment reduces the debt, and its $8 million of interest is an expense.
  Keyed answer. Correct. Borrowing brings in cash but creates an obligation, so it is a financing inflow, not revenue. Debt due within the next year is current: $20 million on the older notes plus the new note’s $8 million first installment = $28 million. In 2028, the $8 million principal payment reduces notes payable; the interest, $160 million × 5% = $8 million, is the cost of using the bank’s money and is an expense. That $8 million is interest on the new note only, not the company’s total interest cost.
• b.The $160 million received on December 31 added to 2027 income because the company’s resources grew. The $28 million of principal due in 2028 is a current liability, and the new note’s interest is a 2028 expense.
  Misconception: Borrowed money is income. Borrowing is not income. Burburr received cash but owes the same amount back, so the loan is a liability and a financing inflow. The borrowed principal is not revenue or expense, although interest on it will be an expense.
• c.The $160 million is a financing inflow. Because the new note is a long-term loan, all of it is a long-term liability; only the $20 million due on older notes is current. Its 2028 interest of $8 million is an expense.
  Misconception: A long-term loan is entirely noncurrent, whatever its payment dates. Classification depends on when payment is due, not on the original length of the loan. The new note’s first $8 million installment is due December 31, 2028, so that part is current: $20 million + $8 million = $28 million.
• d.The $160 million is a financing inflow, and $28 million of notes payable is current. In 2028, the new note will create $16 million of interest expense: the $8 million installment plus $8 million of interest.
  Misconception: A principal repayment is interest expense. Principal and interest are different even when they are paid together. The $8 million installment repays part of the amount borrowed and reduces the liability; only the $8 million of interest is an expense.

Question 10. Exhibit 1B is reproduced here. Burburr earned $32 million in 2027, but retained earnings rose by only $17 million. Which explanation is correct? (Select one. 1 point.)

• a.Dividends are an expense, so Burburr’s 2027 net income was really $17 million; the income statement overstates earnings by the $15 million paid to stockholders.
  Misconception: Dividends are an expense. Dividends are not an expense. They are a distribution of earnings to stockholders, so they reduce retained earnings but are not deducted in computing net income, which was $32 million.
• b.Part of 2027’s earnings was used to repay loan principal, and repaying a loan reduces retained earnings, so less than the full $32 million was retained.
  Misconception: Borrowing and loan repayments change retained earnings. Repaying loan principal reduces cash and notes payable; it does not touch retained earnings. Only net income and dividends changed retained earnings in 2027.
• c.Retained earnings rose by the $17 million of cash the company set aside in 2027, and the $207 million balance is cash available to pay future dividends.
  Misconception: Retained earnings is cash. Retained earnings is not cash. It is the total of earnings kept in the business over time, and those earnings have been used for many things, including property. Burburr’s cash at December 31 was $65 million, far less than $207 million.
• d.Burburr declared and paid $15 million of dividends: 190 + 32 − 15 = 207. Dividends reduce retained earnings but are not an expense, so they do not reduce net income.
  Keyed answer. Correct. Net income increases retained earnings and dividends decrease it: 190 + 32 − 15 = 207. Dividends distribute earnings to stockholders; they are not a cost of earning revenue, so they reduce retained earnings (and are a financing cash outflow) but never appear on the income statement.

Question 11. The cash flow subtotals from Exhibit 1C are reproduced here. Cash increased from $40 million to $65 million. Which is the best explanation of the increase? (Select one. 1 point.)

• a.Cash rose $25 million because Burburr’s activities brought in $25 million more than they used, and that increase is the company’s profit for 2027.
  Misconception: The increase in cash is net income. The $25 million increase in cash is not net income, which was $32 million. The cash increase combines operating, investing, and financing flows, including borrowing, which is not income.
• b.Operating activities provided $60 million and financing activities provided $125 million. Together they covered $160 million of investing payments and left cash $25 million higher; borrowing was a major source.
  Keyed answer. Correct. 60 − 160 + 125 = 25. Operating cash of $60 million could not cover $160 million of investing payments on its own; $125 million of net financing cash, mostly the new note, closed the gap and left cash higher. A larger cash balance does not mean every part of the business improved.
• c.Guests and customers provided the entire increase: higher revenue brought in more cash than the company spent, and that cash added $25 million to the balance.
  Misconception: Customers provided all of the increase in cash. Operating activities, which include collections from customers, provided $60 million, not enough by themselves to cover $160 million of investing payments. Financing, mainly the new loan, provided $125 million.
• d.The $160 million of investing outflows shows that Burburr lost money on its investments in 2027, and new borrowing replaced the cash that was lost.
  Misconception: Investing outflows are losses. Investing outflows are payments for long-term assets such as the renovation, not losses. The cash was exchanged for property that will serve the business in future years.

Question 12. Exhibit 7A reconciles 2027 net income to net cash provided by operating activities. Which interpretation of $32 million of net income and $60 million of operating cash flow is correct? (Select one. 1 point.)

• a.Depreciation set aside $30 million of cash in 2027 for replacing property, which is the main reason operating cash flow was larger than net income.
  Misconception: Depreciation produces or sets aside cash. Depreciation does not produce or set aside cash. It allocates the cost of property to the years it is used, and it required no cash payment this year, so the reconciliation adds it back to undo its effect on net income.
• b.Operating cash flow was larger than net income because cash from the new note received on December 31 helped pay 2027 operating costs such as payroll and supplies.
  Misconception: Loan proceeds are operating cash. Borrowing is a financing activity. The new note’s $160 million appears under financing in Exhibit 1C, and the reconciliation in Exhibit 7A does not include it.
• c.Depreciation of $30 million used no cash in 2027, so it is added back; changes in operating assets and liabilities then reduce the total by a net $2 million, giving $60 million.
  Keyed answer. Correct. 32 + 30 − 2 = 60. Depreciation reduced net income but required no cash payment in 2027, so the reconciliation adds it back; adding it back removes a noncash expense, it does not create cash. The increases in net receivables, inventory, and prepaid costs reduce operating cash flow relative to net income; the increases in payables, wages payable, and customer deposits offset part of that reduction. Together these changes produce a net deduction of $2 million.
• d.Because operating cash flow was positive and larger than net income, every customer who owed Burburr money at year-end can be expected to pay in full.
  Misconception: Positive operating cash flow proves every receivable is collectible. Operating cash flow measures the year’s cash from operations; it says nothing about whether particular receivables will be collected. Marcus said the allowance is an estimate, and some balances are expected to be lost.

Question 13. Marcus’s team computed the three ratios in the table from Exhibit 1, using the definitions given. Which is the strongest combined interpretation? (Select one. 1 point.)

• a.Cash rose to $65 million, so the lower net profit margin and the higher debt to assets ratio are not concerns at this time; the company can clearly meet its obligations.
  Misconception: A larger cash balance outweighs every other signal. A larger cash balance does not offset a lower profit margin or heavier reliance on liabilities. Much of the cash came from borrowing, which is also what raised the debt to assets ratio.
• b.The current ratio fell even though cash rose, because current liabilities, including debt due within a year, grew faster than current assets. Net profit margin also fell, and liabilities financed a larger share of assets.
  Misconception: Misreading the direction of the current ratio. Check the direction. In these statements the current ratio rose from 1.57 to 1.65; current assets, including cash, grew faster than current liabilities. The rest of this reading is accurate, but liquidity measured this way improved slightly.
• c.Because debt to assets rose to 57.5%, Burburr has borrowed more than a company in its industry should, so its financial position is weak whatever the other ratios show.
  Misconception: Judging a ratio against a benchmark the packet does not provide. The packet gives no industry benchmark, and no ratio is good or bad in every situation. The meaningful information here is the direction of change across the three ratios taken together.
• d.The current ratio improved modestly, but net profit margin fell and liabilities financed a larger share of assets. Collections and payment timing should be checked before concluding that liquidity is adequate.
  Keyed answer. Correct. The ratios point in different directions: liquidity improved slightly (1.57 to 1.65), profit per dollar of revenue fell (6.4% to 5.3%), and liabilities finance more of the assets (48.3% to 57.5%). No single ratio settles the question. Because the current ratio counts receivables and compares them with obligations due at different times, the timing of collections and payments still matters.

Question 14. Select exactly two statements that together best support this conclusion: the larger year-end cash balance does not by itself show that Burburr’s overall performance improved. (Select exactly two. 1 point for each correct selection.)

• a.All $12 million of customer deposits at December 31 had been earned by year-end, so the higher cash balance came from completed sales.
  Misconception: Customer deposits are earned revenue (false statement). Not supported. Customer deposits of $12 million at year-end are for services not yet provided; they are a liability, not completed sales.
• b.Cash increased $25 million while net financing cash flow was $125 million and net investing cash flow was negative $160 million.
  Keyed answer. Correct. Without the net financing inflow, mainly the new note, cash would have fallen. The higher balance reflects borrowing, not only operations.
• c.Revenue rose from $560 million to $600 million, an increase of $40 million over the prior year.
  Misconception: A true fact that does not support the conclusion. True, but it does not support the conclusion. Higher revenue is the result corporate is already reading as good news; on its own it says nothing about whether the larger cash balance reflects better performance.
• d.Net income fell from $36 million to $32 million, and operating cash flow fell from $64 million to $60 million.
  Keyed answer. Correct. Both measures of operating performance declined even though cash rose, so the higher cash balance did not come from better operating results.

Question 15. Before corporate commits any of the year-end cash to new projects, which additional analysis should Renee request? (Select one. 2 points.)

• a.A dated cash forecast for 2028 showing expected collections and the timing of payments for guest services, payroll, suppliers, loan principal, and interest, including the effect of slower collections.
  Keyed answer. Correct. Marcus’s point was that having cash today is different from having enough cash on the dates commitments come due. A dated forecast lines up expected collections against payments to suppliers, employees, and lenders and the services owed to guests who paid in advance; testing slower collections shows how much of the cash is truly available. The packet does not show a cash shortage; the forecast is how corporate would find out before committing the cash.
• b.A monthly recalculation of the current ratio; as long as the ratio keeps improving, the year-end cash can be treated as available for new commitments.
  Misconception: The current ratio alone shows whether cash is available. Even when recalculated monthly, the current ratio is a snapshot at each measurement date. It does not show when cash will be collected or when payments fall due, so it cannot show how much cash is available for new commitments.
• c.A list of customer deposits by guest, so that the $12 million collected in advance can be released for new projects now that the money is in the bank.
  Misconception: Customer deposits are free cash. Customer deposits are a liability: Burburr owes those guests stays and events. The cash is unrestricted, but corporate must account for the expected cash costs and timing of providing the promised services before deciding how much cash can support new projects.
• d.A net present value of Blue Tower Premier based on the company’s 2027 revenue and net income, so corporate can decide how much cash to commit to the pilot.
  Misconception: Evaluating a program without its own incremental cash flows. A net present value needs Premier’s own incremental cash flows. Company-wide revenue and net income for 2027 do not measure what Premier adds, and Premier has no results yet.

Question 16. Now that the Blue Tower has reopened, corporate will have more questions. Which question cannot be answered from the year-end packet and would need new information? (Select one. 1 point.)

• a.How much cash did Burburr hold at December 31, 2027, and how did that compare with a year earlier?
  Misconception: A question the packet already answers (year-end cash). The packet answers this one: cash was $65 million at December 31, 2027, up from $40 million.
• b.How much did Burburr owe guests at year-end for stays and events they had already paid for?
  Misconception: A question the packet already answers (deposit obligations). The packet answers this one: customer deposits for future services were $12 million at year-end.
• c.Will the additional revenue from Premier guests be greater than the additional costs of providing the Premier package?
  Keyed answer. Correct. Whether Premier’s additional benefits justify its additional costs depends on how the program performs: which guests buy it, what it costs to deliver, and what it adds. That is program-specific operating evidence the year-end statements do not contain. The packet establishes the starting position; it does not answer that decision.
• d.How much did the dividends declared in 2027 change the retained earnings balance?
  Misconception: A question the packet already answers (dividends and retained earnings). The packet answers this one: dividends of $15 million reduced retained earnings (Exhibit 1B).

Question 17. Renee needs a short report she can send to corporate. Exhibit 7B shows the correct figures from the case. Which report is best supported by the year-end packet? (Select one. 2 points.)

• a.Burburr finished 2027 in a stronger financial position than a year earlier. Revenue grew to $600 million, and cash rose to $65 million, so the company has more resources to work with. Operating activities provided $60 million of cash, total assets grew to $770 million, and the company still paid $15 million of dividends to its stockholders. The $150 million renovation is complete and paid for, and customer deposits of $12 million show strong advance demand. Because cash is higher, corporate can treat the larger cash balance as available for new commitments. The company is well positioned as the Blue Tower reopens.
  Misconception: Cash growth shows a stronger company. Every figure in this report is accurate, but the conclusion is not supported. It leaves out that net income and operating cash flow fell, that borrowing produced much of the cash, and that some of the cash relates to services still owed. Treating the larger cash balance as available ignores when obligations come due.
• b.Burburr earned $32 million and generated $60 million of operating cash, but both measures fell from the prior year even as revenue rose. Ending cash increased to $65 million while substantial borrowing helped fund investment. The $150 million renovation is an asset for future use; it is not a 2027 operating loss. Some customer cash relates to services still owed, and receivables include collection risk. The current ratio improved modestly, while profit margin declined and liabilities financed a larger share of assets. Corporate should review a dated cash forecast before making further commitments. These statements describe the company’s starting position; they do not establish whether Premier will be profitable.
  Keyed answer. Correct. This report uses the whole packet. It acknowledges what went well without treating it as proof of overall improvement; it separates cash from income and borrowing from earnings; it treats the renovation as an asset; it names the obligations and the collection risk; it reads the current ratio correctly (it improved modestly); it recommends a reasonable next step; and it claims nothing the statements cannot show about Premier.
• c.The year 2027 was weaker than the revenue figure suggests. Although revenue rose to $600 million, the company spent $150 million on the Blue Tower renovation, far more than its $32 million of net income, so 2027 effectively produced a loss. Investing payments of $160 million exceeded operating cash of $60 million, and borrowing had to replace the cash that was spent. Net profit margin fell to 5.3%. Corporate should treat the renovation as a cost of 2027 and expect weaker results until it is recovered. The company’s position declined during the year.
  Misconception: Spending on a long-term asset is a loss of the current year. The renovation is not a 2027 loss. Its cost is an asset that will be depreciated beginning when the improvements are available for their intended use, January 1, 2028. Comparing a long-term investment with one year’s net income mixes up investing and operating results.
• d.Burburr earned $32 million and generated $60 million of operating cash, but both measures fell from the prior year even as revenue rose. Ending cash increased to $65 million while substantial borrowing helped fund investment. The $150 million renovation is an asset for future use; it is not a 2027 operating loss. Some customer cash relates to services still owed, and receivables include collection risk. The current ratio fell despite the higher cash, and profit margin declined while liabilities financed a larger share of assets. Corporate should review a dated cash forecast before making further commitments. These statements describe the company’s starting position; they do not establish whether Premier will be profitable.
  Misconception: Misreading the direction of the current ratio. Close, but the liquidity sentence is wrong for these statements: the current ratio rose from 1.57 to 1.65. The report that reads the current ratio correctly is the better-supported one.