Interpreting Financial Statements: Affiliated Firms
The PolyGram Group includes businesses around the world that are chiefly involved in acquisition, production, and marketing in the music industry, as well as the manufacture, sale, and distribution of prerecorded sound carriers, such as compact discs, cassettes, and records. In addition, PolyGram is engaged in activities with respect to music video, in the production of films and television programming, and in music publishing. Its income statements are summarized below (in millions of Netherlands guilders).
| 1994 | 1993 | |
| Net sales | 8,600 | 7,416 |
| Direct costs of sales | (4,543) | (3,909) |
| Gross income | 4,057 | 3,507 |
| Selling, general and administrative expenses | (2,988) | (2,575) |
| Income from operations | 1,069 | 932 |
| Financial income and expenses | 8 | (5) |
| Income before taxes | 1,077 | 927 |
| Income taxes | (302) | (264) |
| Income after taxes | 775 | 663 |
| Equity in income of nonconsolidated companies | (9) | (20) |
| Group income | 766 | 643 |
| Minority interests | (28) | (29) |
| Net income | 738 | 614 |
Required
a. Discuss any unusual terms or disclosure practices in PolyGram’s income statement.
b. Discuss how and why PolyGram’s income has been reduced due to minority interests and other interests in affiliated companies.
c. Did these interests have a significant effect on PolyGram’s income? Why?
d. What other information would you like to have about PolyGram’s interests in affiliated companies? Why?
e. Evaluate PolyGram’s profitability. Consider its operating income separately from group income and from net income.
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