Question

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NETFLIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Revenues $ $ 2015 6,779,511 4,591,476 824,092 650.788 2013 4.374.562 3,117,203 Year ended December 31, 2014 $ 5,504,656 3,752,760 607,186 472,321 269,741 402.648 469,942 407,329 305,826 378,769 180,301 228,347 (132,716) (50,219) (3,060) (31,225) Cost of revenues Marketing Technology and development General and administrative Operating income Other income (expense) Interest expense Interest and other income (expense) Loss on extinguishment of debt Income before income taxes Provision for income taxes Net income Earnings per share: Basic Diluted Weighted-average common shares outstanding: Basic Diluted (29.142) (3,002) (25,129) 171,074 58,671 112,403 141.885 19.244 122,641 349,369 82,570 266,799 $ $ $ 0.29 $ 0.63 $ 0.28 $ 0.28 $ 0.62 $ 0.26 425,889 436,456 420,544 431,894 407,385 425.327 See accompanying notes to consolidated financial statements

1. Assume that Netflix made the following mistake in preparation of its 2015 statements, and no adjustments were made:  

No entry for accrued interest earned of $4 on debt securities in “short-term investments” was made.

What would be the effect of the error on the following amounts at year-end of 2015?  Circle U/S for understate, O/S for overstate, or NE for no effect.  Ignore income tax effects. (12 points)

1. Total Liabilities                                              US                   OS                   NE

2. Income Before Income Taxes                        US                   OS                   NE

3. Total Assets                                                    US                   OS                   NE

4. Stockholders’ Equity at Year-End                  US                   OS                   NE

Answer 1

As Accrued Interest on debt securities in "short term investment" of $4 has been omitted while preparing the accounts following effects would be stated-

S. no:	Particulars	Effect	Explanation
1	Total Liabilities	Overstated(OS)	As Accrued Interest charged on debentures, the value of debenture would be reduced by the respective amount.
2	Income Before Income Taxes	Overstated(OS)	Since, Accrued interest are the income which are deducted from operating incomes while arriving to profit before taxes
3	Total Assets	Understated(US)	Accrued Interest is the Income earned on the investment which are added to the total value of investment or shown seperately.
4	Stockholder's Equity at the Year end	No Effect (NE)	As debentures do not form part of equity so it will not have any effect on the shareholder's equity.