Blue Tower at Year-End: A Comprehensive Case

Question 1. Renee told you what corporate has already noticed in the year-end packet. Using Exhibit 1, which response to corporate is best supported? (Select one. 1 point.)

• a.Both of corporate’s observations are accurate, but neither shows a better year by itself. Cash rose $25 million, but new borrowing supplied much of it. Total assets grew from $600 million to $770 million, but total liabilities grew from $290 million to $443 million.
  Misconception: Answering an observation corporate did not make (total assets). The figures and the reasoning are accurate, but total assets is not one of the things corporate noticed. Renee said corporate noticed that revenue was higher than the year before and that the company finished the year with more cash. A response has to address both.
• b.Both of corporate’s observations are accurate, but neither shows a better year by itself. Total assets grew from $600 million to $770 million and stockholders’ equity from $310 million to $327 million, but total liabilities grew from $290 million to $443 million.
  Misconception: Answering observations corporate did not make (total assets and equity). The figures and the reasoning are accurate, but neither total assets nor equity is one of the things corporate noticed. Renee said corporate noticed that revenue was higher than the year before and that the company finished the year with more cash. A response has to address those.
• c.Both of corporate’s observations are accurate, but neither shows a better year by itself. Revenue rose $40 million, but expenses rose faster, and net income fell from $36 million to $32 million. Cash rose $25 million, but new borrowing supplied much of it.
  Keyed answer. Correct. Renee said corporate noticed higher revenue and more cash, and both are accurate. 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. Cash rose $25 million, but Exhibit 1C shows $160 million of new borrowing. Revenue and cash are inputs to performance, not the result. (The renovated Blue Tower produced none of these results; it reopened on January 1, 2028.)
• d.Both of corporate’s observations are accurate, but they reflect the renovated Blue Tower more than the rest of the company. The tower’s 550 rooms produced most of the $40 million increase in revenue, and the renovation produced most of the growth in total assets, from $600 million to $770 million.
  Misconception: Crediting the year’s results to a tower that had not yet reopened. Renee said corporate noticed higher revenue and more cash, and that the statements show the year that just ended and the financial position at December 31, the day before the tower reopened. No guest stayed in the renovated tower during 2027, so it produced none of the 2027 revenue; the increase came from the rest of the company. The renovation did add to property, but total assets is not what corporate noticed.

Question 2. Using Exhibit 2A and what Priya told you about the two groups of guests, how much of the $9 million paid in advance during December belongs in 2027 revenue, and how much is still a customer deposit liability at December 31, 2027? The statements in Exhibit 1 already apply the correct treatment. (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 group packages her team booked were holiday events at the other towers, held in December and finished by December 31, so that $6 million is 2027 revenue. The room reservations were for Blue Tower stays in January, which had not happened at year-end, so Burburr still owes those guests $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. Only one group had been served. Priya said the room reservations were for Blue Tower stays 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 holiday event guests her team booked came in December and 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. Priya said the group packages her team booked ($6 million) were holiday events delivered in December, so they are earned. The room reservations ($3 million) are for January stays, which had not been provided at December 31.

Question 3. Priya also described how the work on reservation refunds is divided today. Which change would most effectively strengthen control over reservation refunds? (Select one. 1 point.)

• a.Move the recording of refunds in the reservation system to an employee with no refund-approval duties, so the person who approves a refund is not the one who records it.
  Misconception: Separating approval from recording, which are already separate. Priya said the supervisor does not record reservations or refunds; other employees already do. This change leaves the actual weakness in place: the supervisor who approves refunds also reconciles the records that would reveal an improper one.
• b.Move the handling of the cash paid out for refunds to an employee with no refund-approval duties, so the person who approves a refund is not the one who pays it out.
  Misconception: Separating approval from cash handling, which are already separate. Priya said the supervisor does not handle cash; different employees do. This change leaves the actual weakness in place: the supervisor who approves refunds also reconciles the records that would reveal an improper one.
• c.Require the Director of Sales and Convention Services to approve every large refund as well, so that no large refund rests on one supervisor’s approval.
  Misconception: Adding a control that is already in place. Priya said large refunds already need her approval. The weakness remains: the supervisor who approves refunds also reconciles the records that would reveal an improper one, and smaller refunds need only that supervisor’s approval.
• d.Move the reconciliation of refund records to bank activity to an employee with no refund or cash duties, so the person who approves a refund is not the one who checks it.
  Keyed answer. Correct. Priya said the supervisor who approves refunds also reconciles the collection and refund records to bank activity every month; recording and cash handling are already assigned to other employees. The weakness is that the person who can approve a refund also checks the records that would reveal an improper one. A reconciliation, or a documented independent review of it, by someone with no refund, recording, or cash duties separates authorization from checking. 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. Using Exhibit 3 and what Marcus told you about the receivables, which statement about Burburr’s receivables at December 31, 2027, is correct? (Select one. 1 point.)

• a.Applying each age group’s loss rate gives estimated losses of $4 million. But the allowance Burburr recorded was a percentage-of-sales estimate, so the reported receivables may not match the aging result.
  Misconception: Misidentifying the method used to record the allowance. Marcus said his team recorded the allowance using the aging assumptions in the exhibit, not a percentage of sales. The balance sheet therefore reports 64 − 4 = $60 million, which matches the aging estimate.
• b.Applying each age group’s loss rate gives estimated losses of $4 million. That allowance is already recorded, so the receivables on the balance sheet need no further adjustment, although collections may differ from the estimate.
  Keyed answer. Correct. Estimated losses are ($50 × 1%) + ($8 × 5%) + ($4 × 40%) + ($2 × 75%) = 0.50 + 0.40 + 1.60 + 1.50 = $4 million. Marcus said his team has already recorded the allowance using these aging assumptions, so the balance sheet reports receivables net of it: 64 − 4 = $60 million, the amount Burburr expects to collect. As he said, the allowance is an estimate across the whole pool: it does not say which customers will fail to pay or exactly when cash will arrive, and a past-due balance is not automatically worthless.
• c.Applying each age group’s loss rate gives estimated losses of $4 million. That allowance has not been recorded yet, so the receivables on the balance sheet must still be reduced by $4 million.
  Misconception: Recording an allowance the statements already include (double counting). Marcus said his team has already recorded the allowance using the aging assumptions, and that you do not need to adjust anything. The balance sheet already reports receivables of $60 million, which is $64 million less the $4 million allowance. Reducing it again would count the same estimated losses twice.
• d.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 on the balance sheet.
  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.

Question 5. Using Exhibit 4, which statement correctly explains how inventory affects Burburr’s 2027 financial 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. Using Exhibit 5 and what Tom told you about the work, which description correctly reports Burburr’s 2027 spending on the Blue Tower renovation and on its other operating facilities? (Select one. 1 point.)

• a.The $150 million renovation is a 2027 operating expense and an operating cash outflow; the $6 million of work on other facilities is property and an investing cash outflow.
  Misconception: Reversing which project improved property and which maintained it. This reverses the two. Tom said the renovation was not a fresh coat of paint: guests will use what was built for many years, so its cost is property and an investing outflow, expensed through depreciation once the tower is ready for use. He said the work on the other facilities only keeps them running the way they were, so it is a 2027 repair expense.
• b.Both the $150 million renovation and the $6 million of work on other facilities are reported as property and as investing cash outflows.
  Misconception: Treating maintenance as an improvement. Tom said the work around the rest of the property, such as fixing leaks, servicing elevators, and repairing fixtures, keeps the other facilities running the way they were; it does not make them any better. Routine repairs are an expense of the year, not an addition to property.
• c.Both the $150 million renovation and the $6 million of work on other facilities are reported as 2027 operating expenses and as operating cash outflows.
  Misconception: Treating a long-term improvement as a cost of the current year. Tom said the renovation was not a fresh coat of paint: guests will be using what was built for many years. Its cost is an asset, expensed through depreciation once the tower is ready for use. Had it been expensed, 2027 would have shown a large loss instead of net income of $32 million. The work on the other facilities is a 2027 expense.
• d.The $150 million renovation is property and an investing cash outflow; the $6 million of work on other facilities is 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. He also said the work on the other facilities only keeps them running the way they were. Those routine repairs 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. Using the renovation’s accounting assumptions and what Tom told you about when guests could first use the renovated rooms, how much depreciation on the renovation belongs in 2027, and how much in 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. Tom said the first night guests could stay in the renovated rooms was January 1, 2028, so there is no renovation depreciation in 2027; the $30 million of 2027 depreciation is for property already in use. 2028 is a full year: $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: Starting depreciation before the asset is ready for use. Depreciation starts when the asset is available for use. Tom said no guest stayed in the renovated tower during 2027; the first night guests could use the rooms was January 1, 2028. So none of the cost is depreciated in 2027.
• c.2027: $5 million; 2028: $10 million
  Misconception: Starting depreciation partway through the year the work was finished. The work was finished by December 31, but Tom said guests could not use the renovated rooms until January 1, 2028. Depreciation begins when the asset is ready for its intended use, so 2027 has none and 2028 has a full year: $10 million.
• d.2027: $0; 2028: $5 million
  Misconception: Taking only part of a year’s depreciation in the first year of use. Tom said the first night guests could use the renovated rooms was January 1, 2028, so the renovation was in use for all of 2028. A full year of straight-line depreciation is $150 million ÷ 15 = $10 million.

Question 8. Using Exhibit 6A, which report of Burburr’s 2027 wages 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. Using Exhibit 6B and what Marcus told you about the new loan, which description of the new note is correct? (Select one. 1 point.)

• a.$8 million of the new note is a current liability at December 31, 2027. In 2028, Burburr records $8 million of interest expense on the note and pays that interest on December 31.
  Keyed answer. Correct. Marcus said the new loan’s first principal payment is due at the end of this year, on December 31, 2028, and that interest started on January 1 and is paid once a year on that same date. Debt due within the next year is current, so the $8 million installment is current; with the $20 million due on the older notes, the current portion is $28 million. In 2028, the interest, $160 million × 5% = $8 million, is the cost of using the bank’s money and is an expense; the $8 million principal payment reduces notes payable and is not an expense. The $160 million received on December 31 is a financing inflow, not revenue.
• b.None of the new note is a current liability at December 31, 2027. In 2028, Burburr records $8 million of interest expense on the note and pays that interest on December 31.
  Misconception: Misjudging when the new note’s first installment is due. Marcus said the new loan’s first principal payment is due at the end of this year, on December 31, 2028. Debt due within the next year is current, whatever the original length of the loan, so the $8 million installment is current. With the $20 million due on the older notes, the current portion is $28 million, as the balance sheet shows.
• c.$8 million of the new note is a current liability at December 31, 2027. In 2028, Burburr records $8 million of interest expense on the note but pays none of it until the note is repaid.
  Misconception: Misreading when the new note’s interest is paid. Marcus said the interest is paid once a year, on December 31, the same date as the principal payment. The $8 million of 2028 interest is an expense of 2028 and is paid on December 31, 2028; none of it waits until the note is repaid.
• d.$8 million of the new note is a current liability at December 31, 2027. In 2028, Burburr records $16 million of interest expense on the note: the installment plus the interest.
  Misconception: A principal repayment is interest expense. Principal and interest are different even when they are paid together. Marcus said principal is the amount borrowed and each principal payment reduces it; interest is the cost of using the lender’s money. The $8 million installment reduces the liability; only the $8 million of interest is an expense.

Question 10. Exhibit 1B is reproduced here. Which explanation of the change in retained earnings during 2027 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. Which is the best explanation of the increase in cash during 2027? (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, mainly from new borrowing. Together they covered $160 million of investing payments and left cash $25 million higher.
  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.Operating activities provided $60 million and financing activities provided $125 million, mainly from issuing new stock. Together they covered $160 million of investing payments and left cash $25 million higher.
  Misconception: Misidentifying the source of the financing cash. The arithmetic is right, but the financing came from borrowing, not stock. Marcus said Burburr took out a new loan on December 31, and Exhibit 1C shows $160 million of proceeds from borrowing. Burburr issued no stock in 2027.
• 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 the difference between the two 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 relies more heavily on liabilities 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. The three ratios point in different directions, so no single ratio settles the question.
  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. Marcus ended his video with a point he wants corporate to keep in mind. Which additional analysis should Renee request so that corporate can act on that point? (Select one. 2 points.)

• a.A dated cash forecast for 2028, matching expected collections against the dates when payments to employees, suppliers, and lenders fall due and prepaid guest services must be provided.
  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 would show 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 month-end current ratio for 2028, comparing current assets with current liabilities at the end of each month to track whether the company’s liquidity is improving.
  Misconception: A ratio at each month-end shows whether cash will be there when payments fall due. Marcus’s point was about dates: having cash today is different from having enough cash on the dates commitments come due. A current ratio, even monthly, is a snapshot at each measurement date; it does not show when cash will be collected or when payments fall due between those dates.
• c.A review of every past-due customer account, with an updated estimate of how much of the year-end receivables Burburr will eventually collect from its customers.
  Misconception: Knowing how much will be collected shows when cash will be available. Collectibility matters, and Marcus said the allowance is an estimate. But his closing point was about timing: whether Burburr will have enough cash on the dates its commitments come due. A receivables review estimates how much will be collected, not when, and it leaves out the payments that are due.
• d.An income statement forecast for 2028, using expected revenue and expenses to estimate how much the company will earn as the reopened Blue Tower fills.
  Misconception: Forecast net income measures the cash available. A forecast income statement estimates revenue and expenses, but it does not show when collections and payments occur. Marcus’s point was about dates, so corporate needs a dated cash forecast before committing cash.

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 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 that served its first guests late in 2027; its depreciation has begun. 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: The renovated tower was in use during the year; the current ratio misread. Two sentences are wrong. Tom said the first night guests could stay in the renovated rooms was January 1, 2028, so the renovation served no guests in 2027, and its depreciation begins in 2028. In these statements the current ratio rose from 1.57 to 1.65.
• 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.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 that served its first guests late in 2027; its depreciation has begun. 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 include the Premier pilot’s first weeks, although it is too early to tell whether Premier will be profitable.
  Misconception: The renovated tower was in use during the year; the statements include Premier results. Two sentences are wrong. Tom said the first night guests could stay in the renovated rooms was January 1, 2028, so the renovation served no guests in 2027, and its depreciation begins in 2028. Renee said the Premier pilot started on January 1, the day the tower reopened, after the year these statements cover, so they include no Premier 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 include the Premier pilot’s first weeks, although it is too early to tell whether Premier will be profitable.
  Misconception: The current ratio misread; the statements include Premier results. Two sentences are wrong. In these statements the current ratio rose from 1.57 to 1.65. Renee said the Premier pilot started on January 1, the day the tower reopened, after the year these statements cover, so they include no Premier results.