REQUIRED: a. The net incomes for the two firms are very similar. Discuss how the total changes to equity due to nonowner transactions compare for the two firms. b. CVS is a U.S.-based chain of retail pharmacies, while Caterpillar is a global manufacturer of heavy-duty construction equipment. How are the companies’ business models reflected in their respective comprehensive incomes? c. How would an analyst reading the financial statements of the two companies compare their relative financial changes over the course of a year? What specific areas might concern an analyst looking at Caterpillar that would not affect CVS?

Shortly after these earnings announcements in 2007, financial markets tightened in response to the collapse of the “subprime” mortgage market. Subprime home mortgages were bundled together by issuing lenders and sold to investors in what are called mortgage-backed securities, which are rated by agencies like Moody’s and S&P. In fact, both companies have come under fire for not accurately rating the risks associated with the subprime securities.

REQUIRED:

a. What will the tightening of credit markets do to the business volume of the ratings agencies?

b. Where on the financial statements will Moody’s and S&P reflect the drop in issuing activity?

c. Assume that the two companies are held responsible for their inaccurate ratings on the mortgage-backed securities. What possible entries might appear on future income statements if the companies’ reputation and business are hurt due to the subprime collapse?