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1. York Inc is a consumer products firm listed in the US stock markets. Its Balance Sheet and Income Statements for the years ending 2019 and 2018 are given below. The Reformulated Statement of Stockholders Equity for the years ending 2019 and 2018 are given below.

YORK INC. INCOME STATEMENTS
Consolidated Income Statement	12 Months Ended
in USD millions, except per share data	Dec. 31, 2019	Dec. 31, 2018
Net Sales	23,815	22,938
Cost of goods sold	15,835	15,234
Gross Profit	7,980	7,704
Sales and general expenses	4,528	4,198
Other (income) and expense, net	185	116
Operating Profit	3,267	3,390
Interest income	24	31
Interest expense	(292)	(330)
Income before tax and other operating income	2,999	3,091
Provision for income taxes	(946)	(895)
Income before other operating income	2,053	2,196
Share of net income of equity companies	277	197
Net Income	2,330	2,393
Net income attributable to NCI	(120)	(132)
Net Income Attributable to Common	2,210	2,261
Earnings Per Share
Basic
Net Income Attributable to Common	3.12	3.19
Diluted
Net Income Attributable to Common	3.09	3.16
YORK INC. BALANCE SHEETS
Consolidated Balance Sheet	Dec. 31, 2019	Dec. 31, 2018
in USD millions
Current Assets
Cash and cash equivalents	1,091	958
Accounts receivable, net	2,966	3,079
Notes receivable	262	242
Inventories	2,848	2,440
Deferred income taxes	224	163
Other current assets	203	155
Total Current Assets	7,594	7,037
Property, Plant and Equipment, net	10,027	9,640
Investments in Equity Companies	449	426
Goodwill	2,884	2,730
Other Intangible Assets	386	372
Long-Term Notes Receivable	430	728
Other Assets	868	918
Total Assets	22,638	21,851
Current Liabilities
Debt payable within one year	293	732
Trade accounts payable	3,903	3,565
Accrued expenses	1,331	1,277
Accrued income taxes	125	95
Dividends payable	323	300
Total Current Liabilities	5,975	5,969
Long-Term Debt	5,784	5,750
Noncurrent Employee Benefits	2,412	2,387
Deferred Income Taxes	755	654
Other Liabilities	269	262
Stockholders' Equity
Preferred stock - 10 million shares outstanding	10	10
Common stock - 708 million shares outstanding	708	708
Additional paid-in capital	510	479
Common stock held in treasury -70 million shares	(5,671)	(4,904)
Accumulated other comprehensive income (loss)	(1,759)	(2,200)
Retained earnings	13,303	12,395
Total Stockholders' Equity available to CSE	7,101	6,488
Noncontrolling interests	342	341
Total Stockholders' Equity	7,443	6,829
Liabilities and Stockholders' Equity, Total	22,638	21,851

Reformulated Statement of Stockholders Equity (in USD millions)
Balance at December 31, 2017		5,795
Transactions with Shareholders
Stock issues for stock options		490
Stock repurchases		(1,107)
Cash Dividend		(1,458)
Total Transactions with Shareholders		(2,075)
Comprehensive income
Net income reported		2,261
Net translation gain (loss)		743
Pension adjustment		(38)
Other		92
Total Comprehensive income for 2018		3,058
Balance at December 31, 2018		6,778

Balance at December 31, 2018		6,778
Transactions with Shareholders
Stock issues for stock options		178
Stock repurchases		(971)
Cash Dividend		(1,279)
Total Transactions with Shareholders		(2,072)
Comprehensive income
Net income reported		2,210
Net translation gain (loss)		391
Pension adjustment		68
Other		39
Total Comprehensive income for 2019		2,708
Balance at December 31, 2019		7,414

Notes:

· The firm bears a 35% statutory tax rate.

· Working cash is estimated to be $120 million and $115 million for 2019 and 2018 respectively.

· Notes receivable bear interest of 8% per calendar year.

Required:

a) Prepare the Reformulated Balance Sheet and Income Statements for the years 2019 and 2018 in preparation for valuation.

b) Comment on what the reformulated financial statements tell you about York’s strategy. (200-300 words)

c) Discuss the implications of earnings management for accounting quality. (500-600 words)

2. Discuss the analysis of the profitability as a breakdown of the return of common equity into its drivers. In your discussion explain why borrowing might lever up the return on common equity. (500-600 words)