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LOS c: Compute a company's normal operating earnings and comprehensive income.

Q1. A firm has entered into a long-term operating lease on its manufacturing equipment that calls for payments of

$100,000 per month over five years. At the end of the first full year, the income statement includes $1.2 million as

lease expense. An analyst wishes to adjust the income statement to reflect this as a capital lease. Assuming no

residual value in the equipment after the lease term, and a 10% interest rate, what income statements entries

would be made for the lease during the first year (assume that the $1.2 million in expense has already been

removed, and assets are depreciated using a straight-line method)?

A)     Interest expense $470,654 and depreciation $941,307.

B)     Interest expense $120,000 and amortization $1.08 million.

C)     Interest expense $436,279 and depreciation $736,721.

Q2. North American Pipelines (NAP) reports the following information in its 2006 financial statements and disclosures (in $millions):

Net Income	323
Minimum pension liabilities	45
Unrealized losses on available-for-sale securities	23
Unrealized losses on held-to-maturity securities	17
Cumulative foreign currency translation adjustment, net	18
Deferred gains from foreign currency hedges	5
Present value of operating leases	215

What is NAP’s comprehensive income for 2006?

A)   $261 million.

B)   $63 million.

C)   $278 million.

Q3. 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.

Q4. 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. What would

be the “normalized” ROE for Firm A and for Firm B, respectively?

A)     17.1 and 16.9.

B)     18.4 and 14.3.

C)     16.0 and 18.0.

Q5. ABC Tie Company reports income for the year 2001 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 2000 and $78,000 greater for the year

2001. If earnings were restated using FIFO to determine the cost of goods sold (COGS), what would the net

income be for the year 2001? Assume a tax rate of 36%. Net income would have been:

A)      $455,760.

B)      $460,240.

C)      $439,760.

Q6. Endrun Company reported net income of $4.7 million in 1999, and $4.3 million in 2000. In reviewing the annual

report an analyst notices that the Endrun took a charge of $2.4 million in 1999 for the costs of relocating its main

office, and in 2000 booked a gain of $900,000 on the sale of its previous office building. What would “normalized

earnings” be for 1999 and 2000 if we assume a tax rate of 36% for both years?

A)     $6.236 million and $3.724 million.

B)     $7.1 million and $5.2 million.

C)     $3.99 million and $2.54 million.

[此贴子已经被作者于2009-3-3 12:40:17编辑过]

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