Accounting Case #2: Acme Packet1

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Case #2: Acme Packet1
Individual Assignment: Preparation of Financial Statements
Acme Packet Overview (Feel free to skim this.)
Acme Packet, Inc. (“Acme Packet” or “the Company”) is the leader in session delivery network solutions which enable the
trusted, first class delivery of collaboration services, applications, and next-generation voice, video, data and unified
communication and collaboration services and applications across Internet Protocol, or IP, networks.
A session delivery network helps individuals and organizations overcome the limitations inherent in using the Internet, or
other best-efforts, unsecured IP networks, for session-based voice, video, data, unified communications and collaboration. A
session delivery network “layers” complementary intelligence and controls “over” an IP transport network composed of IP
routers and Ethernet switches. With the IP transport network providing basic packet routing and delivery services, the “overlay”
session delivery network provides critical session border control and session management functions that ensure prioritized,
secure and trusted delivery of a broad range of services and applications encompassing voice, video, data, and unified
communications and collaboration.
Session delivery networks are comprised of several different product categories that work together to deliver trusted, first
class services and applications. Acme Packet is the world’s leading provider of session border controllers, or SBCs, that are the
cornerstones of session delivery networks. SBCs control session delivery across defined border points where IP networks
connect, known as network borders. SBCs are deployed at network borders between two service providers or between a service
provider and its enterprise, residential or mobile customers.
In addition to SBCs, session delivery networks need additional products to perform critical roles. These include:
• core session manager, or CSM, manages user access and interface application servers;
• multiservice security gateway, or MSG, secures session delivery of data and voice services over untrusted Internet and
wireless fidelity, or WiFi, access networks;
• diameter signaling controller, or DSC, controls diameter signaling within long-term evolution, or LTE, networks and
enable LTE data and voice session roaming;
• session-aware load balancer, or SLB, scales border control for session delivery network solutions, MSG and DSC
deployments;
• session routing proxy, or SRP, routes sessions to/from access and interconnect borders;
• application session controller, or ASC, enables Web 2.0 server applications to initiate and control sessions;
• session recorder, or SR, performs session recording for the session delivery network; and
• NSD manager, or NM, provides essential network element, network and service management functions including
configuration/provisioning, real-time fault and performance management, troubleshooting, and fraud detection and
prevention.
Acme Packet’s session delivery network solutions are used by over 1,925 Acme Packet customers in 109 countries. Our
customers include fixed line, cable, mobile, transit and over-the-top, or OTT, communication service providers, as well as
enterprises, contact centers and government organizations.
We sell our products and support services through over 330 distribution partners and through our direct sales force. Our
distribution partners include many of the largest networking and IP communications equipment vendors throughout the world.

This case is based on the financial statements of Acme Packet Inc. The case has been substantially fictionalized to smooth the
way for students to begin their understanding of financial accounting. No consultations with Acme Packet representatives were
undertaken. However, certain reasonable assumptions were necessary to create the case.

Learning Objectives
• Gain an understanding of the accounting cycle through its application.
• Determine how economic events affect a company’s financial statements.
• Record economic events in the form of changes to (permanent) balance sheet and (temporary)
income statement accounts.
• Determine the relationship between the set of accounts and the financial statements.
• Follow US GAAP to create a balance sheet, income statement and statement of cash flows that
represent the performance of a real, publicly traded company over the course of a fiscal year.
• Apply the set of concepts, definitions, relationships, and measurement principles that underlie the
accounting cycle and financial statements.
Worksheet template:
Accompanying this case is an Excel template to help you organize your work and complete the
requirements with as little unnecessary labor as possible. Trying to work this case manually or
with your own Excel sheet is not recommended. Use cell references whenever applicable.
General Guidelines:
You should note that the organization follows Case #1 very closely. That being said, this case is
designed to be more challenging than Case #1 and is an individual assignment.
Requirements:
a. Refer to the financial statements following the case requirements and open the Excel template
(worksheet) file. The worksheet is organized as a matrix. You will see the labeled rows with the names
of Acme Packet’s permanent (balance sheet) and temporary (income statement) accounts. The columns
are already labeled for the changes you will enter and for balances you will enter or compute, including
the beginning balances (12/31/2015), unadjusted balances (Unadj. Bal.), adjusted balances (Adj.
Balance), closing entry (CLOSING) and the ending balance sheet balances (Ending Balances
12/31/2016). Moreover, the Statement of Cash Flows and the Income Statement are set up for you in
Excel columns AB THROUGH AM.
Analyze transactions and adjustments
Analyze and make entries in the numbered columns for each of Acme Packet’s numbered transactions
below that took place in the year ended December 31, 2016.
For each transaction (and later for each adjusting entry):
i. Decide what accounts are affected;
ii. Decide the amounts;
iii. Decide the direction:
a) Increase; or
b) Decrease;
iv. Enter the amounts to record the transaction; and
v. Be sure the entry balances, that is, ?Assets = ?Lia&SE (the check sums row will automatically
tell you if you are not in balance if its value is other than zero).

Transactions (not necessarily in chronological order—these numbers are rounded and in millions—do
not add “,000,000” to these.)
1. Acme purchased $225 of property and equipment, all paid in cash.
2. Acme purchased on account inventory items costing $400 from its outsource manufacturers.
3. Acme provided maintenance, support and other services to customers and billed those customers the full
amount of $160. The company incurred expenses of $40 to support maintenance, support and other services
(MS&S) provided to these customers, but Acme did not pay for these expenses at the time.
4. Acme sold $2,275 worth of its network equipment (its products) to customers on account. Note: Only focus
on the Revenue here; keep the related expenses in the back of your mind as they must be accounted for
before you prepare your financial statements.
5. Other customers entered into contracts with Acme for maintenance, support and other services, paying $310
of cash in advance. ($300 of that amount is for contracts that will be provided within a year, the rest will
likely be provided in 2-3 years.)
6. Stock was issued to employees exercising stock options for cash. This increased the common stock account
$45.
a. Hint: In this case, the options had been issued to the employees at a prior period and have already
vested (after an option vests, the employee has the right to exercise their options. Exercising an
option involves trading in the option and some cash for the shares of stock.
7. Stock was issued in a seasoned equity offering for a total of $760.
8. Customers paid Acme $2,460 of their accounts.
9. Acme paid its suppliers (outsource manufacturers) $380 of Acme’s accounts owed to the suppliers. $100 was
paid for purchases in 2015 and the rest of the payment was for purchases in 2016.
10. The company paid a total of $1,400 in cash to support sales and marketing (S&M) activities. Of that total,
$10 was spent on other current assets, $30 paid off accrued expenses, and the rest was 2016 sales and
marketing expense.
11. The company paid a total of $210 in cash to support general and administrative (G&A) activities. Of that
total $170 paid off accrued expenses, and the rest was 2016 support general and administrative (G&A)
expense.
12. The company incurred a total of $1,650 worth of expenses to support research and development (R&D)
activities. $900 was on account with another company and the rest was paid in cash.
13. The company received interest income (in cash) of $12 for interest earned in 2016.
14. The company repurchased stock (per agreements with early stage investors) for $290. The stock was not
cancelled, but was held in the Treasury. This will give rise to a negative balance in the Treasury stock
account equal to the cost of the buy-back.
a. Hint: Firms hold their own stock in a Treasury account (called Treasury Stock) when the have
repurchased it, but plan to reissue it in the future. A common reason that the repurchased stock is
held in the Treasury Stock account is that it will be reissued as a part of equity compensation (in
future transactions similar to #6 above). Treasury stock is a contra-equity account—it reduces the
total Stockholders’ Equity.
b. Prepare an unadjusted trial balance by summing the beginning balances in the accounts and the changes you have
entered and try to correct any imbalance you find. The trial balance column labeled “Unadj. Bal.” will

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automatically sum the beginning balances and all the changes you have entered for each account. It is up to you
to find and correct your errors.
c. Enter the changes to the accounts for the following “adjustments and reclassifications.”
15. Depreciation expense is commonly allocated to various expense categories. The total amount of depreciation
and amortization cost for 2016 was determined and $10 was allocated to MS&S, $11 allocated to S&M, $15
allocated to R&D and $5 allocated to G&A.
16. An evaluation of MS&S contracts at year-end indicated that $300 of current deferred revenue had been
earned during 2016. Acme incurred expenses of $110 to support maintenance, support and other services
(MS&S) provided to these customers, but did not pay for these expenses at the time.
17. A year end assessment of the inventory showed that products still on hand had aggregate costs of $110.
Make the necessary adjustment for cost of products sold.
a. Hint: Given the Unadjusted Balance, back into how much of Acme’s inventory was used up if we
need to have an ending balance of $110.
18. Of the unadjusted balance in deferred revenue (non-current), $22 will be earned according to the contract
requirements in 2016. Make the necessary adjustment to reclassify that amount as current deferred revenue.
19. At the end of 2016, Acme owed previously unrecognized expenses to various suppliers and service
providers, including employees of $9 allocated to MS&S, $1 allocated to S&M, and $8 allocated to G&A.
The total was an increase in accrued expenses.
20. Acme taxes paid during 2016 from prior years’ bills totaled $20 (which has not yet been recorded in 2016).
In 2016 Acme also obtained an Income Tax Benefit of $300 (here assume an Income Tax Benefit is the
opposite of Income Tax Expense).2
Record this as a single transaction.
d. Prepare an adjusted trial balance from the spreadsheet and try to correct any errors you find. The trial balance
column labeled “Adj. Balance” will automatically sum the beginning balances and all the changes you have
entered for each account. It is up to you to find and correct your errors.
e. In the “CLOSING” column, enter increases or decreases to close the temporary accounts (produce zero ending
balances in the Ending Balance 12/31/2016 column). The sum of these entries (with the opposite sign) is the
increase or decrease in retained earnings due to the net income or loss generated for the period.
f. Check that your Ending Balance 12/31/2016 column balances and run down and correct any errors. This is your
Balance Sheet for Acme as of 12/31/2016.
g. Use the information from the worksheet you have created to fill in the Income Statement for Acme for the period
ending 12/31/2016. (See Excel Columns AB and AC.)
i. NOTE: You must use cell references (or formulas) for the amounts on the Income Statement. You should not
re-type or hardcode any of the numbers. Re-typing in the numbers is a waste of your time, will increase the
chance of errors, prevents a useful and dynamic document, and may not be all that different from intentionally
making things up (i.e., fraud).
h. Use the information from the worksheet you have created to fill in the Statement of Cash Flows for Acme for the
period ending 12/31/2016. (See Excel Columns AE through AM.) The Statement of Cash Flows Worksheet is
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Taxes are more complicated than this; we have made minor simplifications here. If you want more challenging examples to
work through on taxes or any other topic, please post your request to the Discussion Board and I can provide you with some of
the cases I have created for my Financial Statement Analysis class. These involve carefully considering various complex finance
and accounting issues and applying them to analyze various publicly traded firms. For example, we recently covered Ford and
Tesla’s unique tax positions. Apple, HomeAway and others also have very interesting tax issues.

optional, but is strongly suggested for anyone who cannot complete the Statement of Cash Flows perfectly in less
than three minutes.
i. NOTE: You must use cell references (or formulas) for the amounts on the Statement of Cash Flows. You
should not re-type or hardcode any of the numbers. Re-typing in the numbers is a waste of your time, will
increase the chance of errors, prevents a useful and dynamic document, and may not be all that different from
intentionally making things up (i.e., fraud).
i. Answer the following questions regarding the Statement of Cash Flows by posting your answers in the
Canvas textbox when you upload and submit your Excel worksheet:
Analysis:
i. What is the main reason why their Cash Flows from Operations are higher than Net Income? Is this
sustainable?
ii. Provide a likely and economically sound reason why this company has both an extremely high Gross Margin
and a negative Operating Margin.
Gross Margin is (Total Revenue minus Total Cost of Goods Sold) divided by Total Revenue.
Operating Margin is (Total Revenue minus Total Operating Expenses) divided by Total Revenue.
Mechanics:
iii. Why do we add back a decrease to Accounts Receivable?
iv. What is the Net effect of Depreciation on Cash Flows?