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标题: Financial Reporting and Analysis【 Reading 27】Sample [打印本页]
作者: anshultongia    时间: 2012-3-29 17:36     标题: [2012 L2] Financial Reporting and Analysis【Session 7- Reading 27】Sample

Wanda Brunner, CFA, is analyzing Straight Elements, Inc., (SE). SE is a discount manufacturer of parts and supplies for the railroad industry. She has followed her firm’s suggested financial analysis framework, and has assembled output from processing data. When applying the financial analysis framework, which of the following is the best example of output from processing data?
A)
Audited financial statements.
B)
A written list of questions to be answered by the analysis.
C)
Common-size financial statements.


Common-size financial statements are created in the data processing step of the framework for financial analysis. Audited financial statements would be obtained during the “collect input” phase of the financial analysis framework. Creating a written list of questions to be answered by the analysis is part of the “define the purpose” phase of the financial analysis framework.
作者: anshultongia    时间: 2012-3-29 17:41

An analyst is analyzing TRK Construction (TRK) for possible recommendation to his firm’s clients. He wants to use TRK’s financial statements to answer such questions as “Is TRK suitable for firm clients?”, “Is TRK priced properly relative to peers?”, “What is TRK’s earnings quality?” The analyst is most likely to begin with:
A)
a DuPont analysis.
B)
analysts adjustments to the financial statements.
C)
a review of his firm’s framework for analysis of financial statements.


Analysis of financial statements should be performed in the context of an overall framework for the analysis of financial statements. Specific adjustments or analysis of specific ratios is a secondary concern.
作者: anshultongia    时间: 2012-3-29 17:42

An analyst is developing a framework for financial statement analysis for his firm. The primary goal of financial statement analysis is to:
A)
facilitate an economic decision.
B)
justify trading decisions for purposes of the Statement of Code and Standards.
C)
document portfolio changes for purposes of the Prudent Investor Rule.


The primary goal of financial statement analysis is to facilitate an economic decision. For example, the firm may use financial analysis to decide whether to recommend a stock to its clients. Documentation and justification of trading decisions may be aided by financial statement analysis, but these are not the primary purposes.
作者: anshultongia    时间: 2012-3-29 17:43

An analyst is developing a framework for financial statement analysis for his firm. This framework is most likely to include:
A)
Determine the allocation of firm fees, interpret processed data, and communicate conclusions.
B)
Maintain integrity of capital markets, perform duties to clients and employers, and avoid conflicts of interest.
C)
Define the purpose of the analysis, process input data, and follow up.

Proper analysis framework should include:
作者: anshultongia    时间: 2012-3-29 17:43

An analyst is analyzing a discount manufacturer of parts and supplies. She has followed her firm’s suggested financial analysis framework and has communicated with company suppliers, customers, and competitors. This is an input that occurs while:
A)
processing data.
B)
collecting data.
C)
establishing the objective of the analysis.


Communication with management, suppliers, customers, and competitors is an input during the data collection step. Processing data is the third phase of the financial analysis framework. Establishing the objective of the analysis is part of the “define the purpose” phase of the financial analysis framework.
作者: anshultongia    时间: 2012-3-29 17:44

Inventories are listed on the balance sheet at $600,000, retained earnings are $1.9 Million. In the notes to financial statements, you find a LIFO reserve of $125,000. Also, the probability of a LIFO liquidation is high. Assuming a tax rate of 36%, what will be the adjusted value of retained earnings?
A)
$1,820,000.
B)
$1,980,000.
C)
$1,855,000.


The highly probably LIFO liquidation suggests net income, income tax expense, and equity will rise. The analyst can make this adjustment now for forecasting purposes. The adjustment to retained earnings will be: $125,000 × (1 − 0.36).
作者: anshultongia    时间: 2012-3-29 17:45

George Edwards is a senior analyst with The Edge Group, an independent equity research firm specializing in micro cap companies that have recently had an initial public offering, or are likely to go public within the next three years. Over the current market cycle, small company stocks have been the leading performers in the equity market, and micro cap money managers have had huge cash inflows due to their funds’ strong performance. With an excess amount of cash and few good investment opportunities due to the high valuations in the marketplace, fund managers have turned to independent research firms like The Edge Group to help them discover new investment ideas.
With a large number of mutual fund managers asking them for research reports, business at The Edge Group is booming. To help handle the large amount of business, Edwards has hired two new junior analysts, Paul Kelley and Rachael Schmidt. Both Kelley and Schmidt have degrees in finance, and came highly recommended to Edwards.
In Kelley and Schmidt’s orientation meeting, Edwards told them that what has made The Edge Group successful in delivering quality research to its clients is its willingness to dig into company financial statements and not take the accounting numbers at face value. Every item in the financial statements should be scrutinized and adjusted if necessary. Edwards tells the new analysts that if there is one lesson they should learn, it is that “there is a difference between accounting reality and economic reality.”
For their first assignment, Edwards has asked the new analysts to put together a draft of a research report on Landesign, an architecture firm specializing in landscape design for municipalities, residential developments, and wealthy individuals. The firm also sells various kinds of stone and plastic products which are used in landscaping applications. Edwards tells the new analysts that he will help put together the report, but he would like them to do a majority of the legwork.
Since it was founded seven years ago, Landesign has grown at an annual rate exceeding 20%. Much of the growth comes from Landesign’s acquisitions of regional competitors. Edwards points out to the analysts that Landesign used purchase method accounting. Kelley, looking to impress Edwards with his knowledge, tells him that when one company acquires another, assets of both companies are restated to fair market value, and that higher depreciation can lead to lower quality earnings. Not wanting to be outdone, Schmidt adds that liquidity measures such as the quick ratio and the cash ratio should improve as Landesign makes acquisitions.
Kelley decides to review Landesign’s 2004 financial statements and make notes about significant accounting practices being used. His notes are shown in the exhibit below:

Exhibit 1: Kelley’s Notes on Landesign’s Accounting Practices

Schmidt notices that the footnotes to Landesign’s financial statements include a reference to an agreement to receive a minimum amount of stone used to construct landscape walls from a supplier. Under the terms of the agreement, Landesign will pay for the stone whether it is used in the current accounting period or not. The agreement allows Landesign to pay a price that is significantly less than the current market price for similar quality stone.
A second footnote indicates that Landesign has an eight-year rental commitment for a greenhouse used to grow plants and store mulch that Landesign uses in the landscaping process. On the financial statements, $55,000 in rent expense for the greenhouse is listed on the income statement. The footnote also states that the $55,000 rental expense payment was agreed upon with Fred’s Nursery, the owner of the greenhouse, based upon an interest rate of 7%.
A third footnote indicates that Landesign has sold its accounts receivable to Dais Enterprises for 95% of their original value of $130,000. The footnote indicates that Landesign retains the risk of noncollection of the receivables.
The final footnote on the page indicates that Landesign has a revolving line of credit at which it can borrow funds in the future at an interest rate of 6%.
After going through the information, Kelley and Schmidt discuss their findings and start to work on their report for Edwards.Which of the following items noted in Kelley’s Notes on Landesign’s Accounting Practices would least likely be considered indicators of high earnings quality. Landesign’s use of:
A)
FIFO accounting in a mildly inflationary economy.
B)
the 200% declining balance method of depreciation on its furniture and equipment.
C)
short useful life estimates for fixed assets.


High earnings quality is established by a clear and conservative approach to stating earnings. Even though inflation is relatively mild, FIFO accounting will result in lower cost of goods sold (COGS), and higher net income. This is more aggressive than the use of Last In, First Out (LIFO) method. Short useful lives for fixed assets, use of accelerated depreciation, and using a conservative estimate for returns on pension assets will all tend to increase expenses and are examples of conservative accounting practices.
Which of the following adjustments should Schmidt make to Landesign’s financial statements to account for the greenhouse that Landesign uses to grow plants and store mulch?
A)
Increase both liabilities and assets by $341,500.
B)
Increase liabilities and decrease equity by $440,000.
C)
Increase both liabilities and assets by $328,400.


The rental agreement for the greenhouse is an operating lease and essentially represents off-balance sheet financing. To adjust Landesign’s balance sheet for the operating lease, Schmidt needs to capitalize the lease by increasing both liabilities and assets by the present value of the lease payments. The interest rate used in the present value computation is the lower of the firm’s financing rate or the rate implicit in the lease. We are told that the rental payments of $55,000 are based on an interest rate of 7%. However, we are told in another footnote that Landesign expects to be able to borrow funds in the future at a rate of 6%. We therefore use the lower firm financing rate of 6% in our computation. The present value of the lease payments is: N = 8; I/Y = 6%; PMT = -55,000; FV = 0; CPT PV = $341,539.
作者: anshultongia    时间: 2012-3-29 17:46

Express Delivery Inc. (EDI) reported the following year-end data:

Depreciation expense
$30 million

Net income
$30 million

Total assets
$535 million

Shareholder’s equity
$150 million

Effective tax rate
35 percent

Last year EDI purchased a fleet of delivery vehicles for $140 million. For the first year, straight-line depreciation was used assuming a depreciable life of 7 years with no salvage value. However, at year-end EDI’s management determined that assumptions of a useful life of 5 years with a salvage value of 10 percent of the original value were more appropriate. How would the return on assets (ROA) and return on equity (ROE) for last year change due to the change in depreciation assumptions? ROA and ROE would be closest to:
A)
ROA 5.0% and ROE 18.2%.
B)
ROA 5.7% and ROE 19.5%.
C)
ROA 5.3% and ROE 20.5%.


The reported ROA and ROE are 5.6% (30/535) and 20.0% (30/150) respectively. Under the new depreciation assumptions, depreciation expense would be (140-14)/5 = 25.2 million. Under the original assumptions depreciation of the fleet was 20 million. Therefore depreciation increases by 5.2 million. With the change in depreciation methods EDI would have reported:

Depreciation expense
$35.20 million
(30 + 5.2)

Net income
$26.62 million
(30 − (5.2 × (1-0.35)))

Total assets
$529.80 million
(535 − 5.2 )

Shareholder’s equity
$146.62 million
(150 − 3.38)

Note that assets would have been lower by $5.2 million due to the new depreciation assumptions and shareholder’s equity by $3.38 million (5.2 × (1 − 0.35)) due to lower retained earnings. Tax liabilities would have fallen by $1.82 million to balance the $5.2 million reduction in assets. Therefore, ROA would have been 5.0% (26.62 / 529.80) and ROE would have been 18.16% (26.62 / 146.62).
作者: anshultongia    时间: 2012-3-29 17:46

A firm seeking to lower current tax liability may elect to use which method of inventory valuation during an inflationary period?
A)
FIFO.
B)
LIFO.
C)
Average cost.


During a inflationary period, using LIFO would increase COGS, since the most recent (highest cost) inventory would be sold. Therefore, earnings and taxes would be lowest under LIFO.
作者: anshultongia    时间: 2012-3-29 17:47

Millennium Airlines Corp. (MAC) reported the following year-end data:

Rent expense
$23 million

Depreciation expense
$17 million

EBIT
$88 million

Interest expense
$22 million

Total assets
$500 million

Long-term debt
$150 million

Capital lease obligations
$100 million

Total equity
$250 million

MAC also reported that the present value of its operating leases at the beginning of the year was $240 million. The term on the leases was 8 years. What are the effects on the leverage (liabilities / total capital) and times interest earned if an analyst chooses to capitalize the leases at a rate of 10% using a straight-line depreciation assumption? Leverage measures:
A)
increase to 65% from 50% and times interest earned decreases to 1.33 times from 4 times.
B)
increase to 65% from 50% and times interest earned decreases to 1.76 times from 4 times.
C)
remain unchanged and times interest earned decreases to 1.23 times from 4 times.


Using the reported data the leverage measure is 0.50 ((150 + 100) / (150 + 100 + 250)) and times interest earned is 4 times (88 / 22). Following the capitalization of the operating leases the balance sheet values are:

Total assets
$710 million
(500 assets + 240 leases - 30 depreciation on leases)

Value of operating leases
$210 million
(increase in financing liabilities)

Long-term debt
$150 million
unchanged

Capital lease obligations
$100 million
unchanged

Total equity
$250 million
unchanged

Therefore, the leverage measure is 0.65 ((210 + 150 + 100) / (210 + 150 + 100 +250)).
The income statement is affected in the following way:

reported EBIT
88

+ rent expense
23

= EBIT excluding cost of operating leases
111

- depreciation of operating leases
30
($240 million/8 years)

= adjusted EBIT
81

Interest expense will increase by $24 million ($240 million × 0.10) to $46 million. Therefore times interest earned decreases to 1.76 times (81 / 46). Recall that when capitalizing operating leases interest expense is calculated as the present value of the lease obligations multiplied by implied interest rate.
作者: anshultongia    时间: 2012-3-29 17:48

Millennium Airlines Corp. (MAC) reported the following year-end data:

Rent expense
$23 million

Depreciation expense
$17 million

EBIT
$88 million

Interest expense
$22 million

Total assets
$500 million

Long-term debt
$150 million

Capital lease obligations
$100 million

Total equity
$250 million

MAC also reported that the present value of its operating leases at the beginning of the year was $240 million. The term on the leases was 8 years. What are the effects on the leverage (liabilities / total capital) and times interest earned if an analyst chooses to capitalize the leases at a rate of 10% using a straight-line depreciation assumption? Leverage measures:
A)
increase to 65% from 50% and times interest earned decreases to 1.33 times from 4 times.
B)
increase to 65% from 50% and times interest earned decreases to 1.76 times from 4 times.
C)
remain unchanged and times interest earned decreases to 1.23 times from 4 times.


Using the reported data the leverage measure is 0.50 ((150 + 100) / (150 + 100 + 250)) and times interest earned is 4 times (88 / 22). Following the capitalization of the operating leases the balance sheet values are:

Total assets
$710 million
(500 assets + 240 leases - 30 depreciation on leases)

Value of operating leases
$210 million
(increase in financing liabilities)

Long-term debt
$150 million
unchanged

Capital lease obligations
$100 million
unchanged

Total equity
$250 million
unchanged

Therefore, the leverage measure is 0.65 ((210 + 150 + 100) / (210 + 150 + 100 +250)).
The income statement is affected in the following way:

reported EBIT
88

+ rent expense
23

= EBIT excluding cost of operating leases
111

- depreciation of operating leases
30
($240 million/8 years)

= adjusted EBIT
81

Interest expense will increase by $24 million ($240 million × 0.10) to $46 million. Therefore times interest earned decreases to 1.76 times (81 / 46). Recall that when capitalizing operating leases interest expense is calculated as the present value of the lease obligations multiplied by implied interest rate.
作者: anshultongia    时间: 2012-3-29 18:03

Northern Bottling (NB) currently shows minimum expected operating leases over the next 5 years of $3 million, $2.5 million, $2 million, $2 million, and $1.5 million. The firm’s current financing rate is 6.75% and the rate implicit in the lease contract is 7%. What adjustments would an analyst make to modify the balance sheet of NB to include this off-balance sheet financing? Increase long-term:
A)
assets and long-term liabilities by $9.22 million.
B)
assets and long-term liabilities by $9.27 million.
C)
liabilities by $9.27 million and decrease equity by $9.27 million.


Recall that the interest rate in this present value computation is the lower of the firm’s financing rate or the interest rate that is implicit in the lease.  Therefore, the PV (operating leases) is:
= 3 / (1 + 0.0675) + 2.5 / (1 + 0.0675)2 + 2 / (1+ 0.0675)3 + 2 / (1 + 0.0675)4 + 1.5 / (1 + 0.0675)5

= 9.27 million
The proper adjustment is to increase both long-term assets and liabilities by the same amount.
作者: anshultongia    时间: 2012-3-29 18:04

Northern Bottling (NB) currently shows minimum expected operating leases over the next 5 years of $3 million, $2.5 million, $2 million, $2 million, and $1.5 million. The firm’s current financing rate is 6.75% and the rate implicit in the lease contract is 7%. What adjustments would an analyst make to modify the balance sheet of NB to include this off-balance sheet financing? Increase long-term:
A)
assets and long-term liabilities by $9.22 million.
B)
assets and long-term liabilities by $9.27 million.
C)
liabilities by $9.27 million and decrease equity by $9.27 million.


Recall that the interest rate in this present value computation is the lower of the firm’s financing rate or the interest rate that is implicit in the lease.  Therefore, the PV (operating leases) is:
= 3 / (1 + 0.0675) + 2.5 / (1 + 0.0675)2 + 2 / (1+ 0.0675)3 + 2 / (1 + 0.0675)4 + 1.5 / (1 + 0.0675)5

= 9.27 million
The proper adjustment is to increase both long-term assets and liabilities by the same amount.
作者: anshultongia    时间: 2012-3-29 18:04

Northern Bottling (NB) currently shows minimum expected operating leases over the next 5 years of $3 million, $2.5 million, $2 million, $2 million, and $1.5 million. The firm’s current financing rate is 6.75% and the rate implicit in the lease contract is 7%. What adjustments would an analyst make to modify the balance sheet of NB to include this off-balance sheet financing? Increase long-term:
A)
assets and long-term liabilities by $9.22 million.
B)
assets and long-term liabilities by $9.27 million.
C)
liabilities by $9.27 million and decrease equity by $9.27 million.


Recall that the interest rate in this present value computation is the lower of the firm’s financing rate or the interest rate that is implicit in the lease.  Therefore, the PV (operating leases) is:
= 3 / (1 + 0.0675) + 2.5 / (1 + 0.0675)2 + 2 / (1+ 0.0675)3 + 2 / (1 + 0.0675)4 + 1.5 / (1 + 0.0675)5

= 9.27 million
The proper adjustment is to increase both long-term assets and liabilities by the same amount.
作者: anshultongia    时间: 2012-3-29 18:04

Adjustments for off-balance-sheet items include all but which of the following?
A)
Capitalizing operating leases, including this amount as an asset and a liability.
B)
Using the equity method in place of the proportionate consolidation to reflect the investment in affiliates.
C)
Estimating the probable obligation for contingent liabilities.


The correct statement is that proportionate consolidation should be used in place of the equity method.
作者: anshultongia    时间: 2012-3-29 18:05

A firm has booked as a sale, the transfer of $100 million in short-term accounts receivable to Public Finance Co., subject to recourse. The notes to the financial statements disclose that as of the end of the fiscal year, $80 million remained uncollected. In order to reflect this on the balance sheet, which of the following adjustments must be made?
A)
Decrease cash and increase accounts receivable.
B)
Increase accounts receivable and increase current liabilities.
C)
Decrease retained earnings and increase accounts receivable.


Since the accounts receivable were sold with recourse, the risk on uncollected accounts remains with the company
作者: anshultongia    时间: 2012-3-29 18:06

What does the LIFO reserve measure?
A)
The accumulated difference between the reported inventory balance and the cost of that inventory if first in, first out (FIFO) had been used.
B)
The results of older inventory flowing to cost of goods sold (COGS).
C)
The overstatement relative to the current cost of inventory.


The LIFO reserve measures the accumulated difference between the reported inventory balance and the cost of that inventory if FIFO had been used
作者: anshultongia    时间: 2012-3-29 18:06

Due to a change in accounting standards, TRK Construction’s QSPE must now be consolidated. Assume the current ratio before consolidation is 1.10. Consolidation will most likely result in which of the following:
A)
an increase in the current ratio.
B)
a decrease in the current ratio.
C)
no change in the current ratio.


The correct treatment for consolidation of the QSPE would be an increase in assets and in liabilities by the same amount. If the current ratio is greater than one, consolidation would decrease the current ratio.
作者: anshultongia    时间: 2012-3-29 18:07

Assume that inventory costs are increasing in line with an overall inflation rate of 3 percent. If a firm reports inventory using the last in, first out (LIFO) method, which of the following is most accurate?
A)
The less expensive inventory is flowing out to COGS.
B)
Lower profits and lower taxes are reported because new inventory is flowing out to COGS.
C)
LIFO reserve measures the accumulation of taxes paid.


LIFO firm reports lower profits and lower taxes because all of the new, mores expensive inventory is flowing out to COGS thus, LIFO reserve measures the accumulation of taxes not paid and profits not recognized
作者: anshultongia    时间: 2012-3-29 18:07

An analyst finds return-on-equity (ROE) a good measure of management performance and wants to compare two firms: Firm A and Firm B. Firm A reports net income of $3.2 million and has a ROE of 18. Firm B reports income of $16 million and has an ROE of 16.

A review of the notes to the financial statements for Firm A, shows that the earnings include a loss from smelting operations of $400,000 and that the firm has exited this business. In addition, the firm sold the smelting equipment and had a gain on the sale of $300,000.

A similar review of the notes for Firm B discloses that the $16 million in net income includes $2.6 million gain on the sale of no longer needed office property. Assume that the tax rate for both firms is 36%, and that the notes describe pre-tax amounts. Which of the following is closest to the “normalized” ROE for Firm A and for Firm B, respectively?
A)
17.1 and 16.9.
B)
16.0 and 18.0.
C)
18.4 and 14.3.


The ROE for Firm A is adjusted for the $400,000 loss on discontinued operations and the $300,000 non-recurring gain. The ROE for Firm B is adjusted to remove the effects of the $2.6 million one-time gain.

The first step in this problem is to solve for equity using ROE. Then, “normalize” net income by adjusting for discontinued operations and non-recurring items. Then, solve for “normalized” ROE.

Firm A:
18% = 3,200,000 / EquityA
EquityA = 17,777,778 (rounding)
Normalized Net IncomeA = 3,200,000 + (1 – 0.36)(400,000 – 300,000)
Normalized ROEA = 3,264,000 / 17,777,778 = 18.360%

Firm B:
16% = 16,000,000 / EquityB
EquityB = 100,000,000
Normalized Net IncomeB = 16,000,000 + (1 – 0.36)(–2,600,000)
Normalized ROEB = 14,336,000 / 100,000,000 = 14.336%

18.360 and 14.336 are closest to 18.4 and 14.3
作者: anshultongia    时间: 2012-3-29 18:07

An analyst finds return-on-equity (ROE) a good measure of management performance and wants to compare two firms: Firm A and Firm B. Firm A reports net income of $3.2 million and has a ROE of 18. Firm B reports income of $16 million and has an ROE of 16.

A review of the notes to the financial statements for Firm A, shows that the earnings include a loss from smelting operations of $400,000 and that the firm has exited this business. In addition, the firm sold the smelting equipment and had a gain on the sale of $300,000.

A similar review of the notes for Firm B discloses that the $16 million in net income includes $2.6 million gain on the sale of no longer needed office property. Assume that the tax rate for both firms is 36%, and that the notes describe pre-tax amounts. Which of the following is closest to the “normalized” ROE for Firm A and for Firm B, respectively?
A)
17.1 and 16.9.
B)
16.0 and 18.0.
C)
18.4 and 14.3.


The ROE for Firm A is adjusted for the $400,000 loss on discontinued operations and the $300,000 non-recurring gain. The ROE for Firm B is adjusted to remove the effects of the $2.6 million one-time gain.

The first step in this problem is to solve for equity using ROE. Then, “normalize” net income by adjusting for discontinued operations and non-recurring items. Then, solve for “normalized” ROE.

Firm A:
18% = 3,200,000 / EquityA
EquityA = 17,777,778 (rounding)
Normalized Net IncomeA = 3,200,000 + (1 – 0.36)(400,000 – 300,000)
Normalized ROEA = 3,264,000 / 17,777,778 = 18.360%

Firm B:
16% = 16,000,000 / EquityB
EquityB = 100,000,000
Normalized Net IncomeB = 16,000,000 + (1 – 0.36)(–2,600,000)
Normalized ROEB = 14,336,000 / 100,000,000 = 14.336%

18.360 and 14.336 are closest to 18.4 and 14.3
作者: anshultongia    时间: 2012-3-29 18:08

Which of the following statements is CORRECT when inventory prices are falling?
A)
LIFO results in lower COGS, higher earnings, higher taxes, and lower cash flows.
B)
LIFO results in higher COGS, lower earnings, higher taxes, and higher cash flows.
C)
LIFO results in lower COGS, lower earnings, lower taxes, and higher cash flows.


Remember, prices are falling. Under LIFO, the most recent purchases flow to COGS. So, LIFO results in lower COGS, higher earnings, higher taxes, and lower cash flows.
作者: anshultongia    时间: 2012-3-29 18:08

MKF Consolidated reports $500 million in goodwill on its balance sheet. The market consensus indicates that the value of MKF’s intangible assets is $300 million. How should an analyst adjust MKF’s balance sheet? Reduce goodwill and:
A)
increase liabilities by $200 million.
B)
equity by $500 million.
C)
equity by $200 million.


If goodwill has no economic value apart from the firm, it should be eliminated from the balance sheet. If the value of the intangibles can be reliably estimated they can be substituted for accounting goodwill.
作者: anshultongia    时间: 2012-3-29 18:08

A firm has reported net income of $136 million, but the notes to financial statements includes a statement that the results “include a $27 million charge for non-insured earthquake damage” and a “gain on the sale of certain assets during restructuring of $16 million.” If we assume that both of these items are given on a pre-tax basis and the effective tax rate is 36%, what would be the “normal operating income?”
A)
$94.08 million.
B)
$147.00 million.
C)
$143.04 million.

To normalize earnings you would increase it by the non-recurring charge of $27 million and decrease it by the non-recurring gain, both tax adjusted.
$136 + (27 - 16)(1 - 0.36) = $143.04.
作者: anshultongia    时间: 2012-3-29 18:09

ABC Tie Company reports income for the year 2009 as $450,000. The notes to its financial statements state that the firm uses the last in, first out (LIFO) convention to value its inventories, and that had it used first in, first out (FIFO) instead, inventories would have been $62,000 greater for the year 2008 and $78,000 greater for the year 2009. If earnings were restated using FIFO to determine the cost of goods sold (COGS), what would the net income be for the year 2009? Assume a tax rate of 36%. Net income would have been:
A)
$460,240.
B)
$455,760.
C)
$439,760.


The reduction in COGS would result in an increase in net income (62,000 − 78,000) × (1 − 0.36).
作者: leadcfa    时间: 2012-3-29 18:11

Coastal Drilling Corp (CDC) reported the following year-end data:

EBIT
$23 million

EBT
$20 million

Effective tax rate
40 percent

CDC reported in the footnotes to its financial statements that it had increased the expected return on pension plan assets assumption which resulted in an increase of EBIT of $2 million. Analyst Wanda Brunner, CFA, thinks this change in assumptions is unfounded and removes the $2 million increase in EBIT. Which of the following is closest to the tax burden ratio after adjustment?
A)
61.9%.
B)
60.0%.
C)
55.6%.


Tax burden = NI/EBT or 1 - the effective tax rate. The increase in the return on pension plan assets assumption increased EBIT, EBT, Income Taxes, and Net Income from what it would have been. Removing $2 million from the reported numbers will reduce EBIT, EBT, Income Taxes, and Net Income. However, the tax burden ratio will still be 1 - the effective tax rate.



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