V5-64 Assume U.S. GAAP Lazlo Ltd, a European-based telecommunications provider, follows IASB GAAP and capitalizes new product development costs. During 2007 they spent €25 million on new product development and reported an amortization expense related to a prior year’s new product development of €10 million. Other information related to 2007 is as follows: in € millions Net income 225 Average assets 1,875 Cash flow from operations 290 An analyst would like to compare Lazlo to a U.S.-based telecommunications provider and has decided to adjust their financial statements to U.S. GAAP. Under U.S. GAAP, and ignoring tax effects, the return on assets (ROA) and cash flow from operations (CFO) for Lazlo would be closest to: ROA CFO millions A. 10.70% 265 B. 10.70% 275 C. 11.20% 265 D. 11.20% 275
Guys, this is what I think can be a solution Net Income= 225-25+10=210 Total Asset: 1877-25+10=1870 Note: The logic behind it is the we should adjust both Net Income and Total Asset for the same amount as if the cost was fully expensed (hence also in the total assets we should add back the depreciation as the fixed asset is reported at net). ROA= 210/1870=11.2% CFO= 290-25=265 Let me know what do you think
Why is amortization afferent to a previous year added back to the NI result of 2007? This is an expense occured in a previous year, not in 2007.
map1 Wrote: ------------------------------------------------------- > Why is amortization afferent to a previous year > added back to the NI result of 2007? This is an > expense occured in a previous year, not in 2007. The amortization is related to the prior year development cost but still subtracted in 2007. This was my idea. Do you think is not correct?
Since it was an expense of 2006 (previous year) it should not be added to the 2007’s NI, it was not an expense of 2007 deducted from Revenues of 2007 in arriving at NI of 2007. It should however be added to Assets, since it decreased the asset base in 2006 and it requires an adjustment.
So in this case the result is A.
I think so.
CFO = 290 - 25 = 265 NI = 225 - 25 = 200 and Assets = 1875 - 25 + 10 so you’d get A. is that rigth answer?
pepp Wrote: ------------------------------------------------------- > CFO = 290 - 25 = 265 > > NI = 225 - 25 = 200 > and Assets = 1875 - 25 + 10 > so you’d get A. > > is that rigth answer? Yes I think so.
So the consensus is A?
There is no consensus:) we’re debating:)
“A consensus means that everyone agrees to say collectively what no one believes individually” Abba Eban quotes
strange days, this step is wrong. pls double check, Total Asset: 1877-25+10=1870 should be Total Asset 1875-25+10=1860
I am geeting A too but I am not sure of what i am doing. Strange days do you have the answer and any explanation?
I did get C as my answer when I worked the problem, I’m pretty sure the CFO part is pretty straight forward but the question is that 10 mil. I would think that if it is amortization of an R&D expense that was incured last period and was capitalized and the company is amortizing a portion of it on the 2007 statements, we would add that amortization expense back to NI. I could be wrong. One more thing to add to the list of items to review…
Andrey, thanks to bring up the error. This is what I think is the solution: Net Income= 225-25=200 Total Asset: 1875-25+10=1860 ROA= 200/1860=10.7% CFO= 290-25=265 Let me know what do you think
strangedays Wrote: ------------------------------------------------------- >> Net Income= 225-25=200 ============================================ if you minus 25M capitalized expense from income, should also add back the 10M amortization expense from capitalized development cost of previous year . should be NI=225-25+10=210
anyone have a real answer for this one? I got 2 answers, not really sure which is right???
We were debating over this, and we thought that since the amortizaton is an non-cash expense incurred during a previous year, it should not be deducted from the NI of 2007. annexguy Wrote: > if you minus 25M capitalized expense from income, > should also add back the 10M amortization expense > from capitalized development cost of previous year > . > should be NI=225-25+10=210
map1 Wrote: ------------------------------------------------------- > We were debating over this, and we thought that > since the amortizaton is an non-cash expense > incurred during a previous year, it should not be > deducted from the NI of 2007. > > > annexguy Wrote: > > if you minus 25M capitalized expense from > income, > > should also add back the 10M amortization > expense > > from capitalized development cost of previous > year > > . > > should be NI=225-25+10=210 Map thanks for replying to annex. I was having a quick dinner! 