National Chemical Corp. (NCC) reports 2003 net earnings of $354.2 million. NCC’s financial statements and disclosures also indicate pretax impairment charges of $78.1 million and pretax amortization of $24.9 million. NCC also reports an after-tax loss of $23.4 million on the early retirement of debt and receipt of $118 million after-tax from an insurance claim. NCC effective tax rate is 36%. What are the normal operating earnings of NCC? A) $325.52 million. B) $414.68 million. C) $480.60 million. Be back in 10 min’s
Your answer: A was correct! NCC’s normal operating earnings are calculated as: Net income 354.20 + After-tax impairment charge 78.1 × (1 - 0.36) = 49.98 + After-tax amortization charge 24.9 × (1 - 0.36) = 15.94 + After-tax loss on debt retirement 23.40 − After-tax insurance settlement 118.00 Normal operating earnings 325.52 Recall that all adjustments are made on an after-tax basis.
Based on her analysis of Maxwell Research’s internal operations and business climate, analyst Jane Kilgore is concerned about management’s opportunities to commit fraud. Which of the following characteristics should worry Kilgore least? A) More than half of Maxwell’s revenue is generated in emerging markets. B) Maxwell’s market penetration gives it the ability to dictate terms to vendors. C) More than a third of Maxwell’s total sales go to its own consolidated subsidiaries D) Planner’s talking to himself again
A) More than half of Maxwell’s revenue is generated in emerging markets.
Your answer: C was correct! High levels of related-party transactions are worrisome, particularly when those parties are not audited. But transactions within the company between subsidiaries consolidated in a company’s audited financial statements are neither unusual nor a particularly fertile ground for fraud. Both remaining characteristics are legitimate risk factors.
A for both questions
The second one was C This one tripped me up… A manufacturing firm purchases equipment for use in its operations. With regards to recording the purchase using the cash basis versus the accrual basis of accounting, which of the following statements is most appropriate? A) With the cash basis, revenues and expenses relating to the equipment are generally recognized in the same period. B) With the cash basis, revenues and expenses relating to the equipment are generally recognized in different periods. C) With the accrual basis, the cost of the equipment is allocated to the cash flow statements over the asset’s life.
I think it’s B
Yes…B. I’m done with adj’s for the day. I try to do 10 adj’s and an ethics vignette or two every morning…trying to get things to stick. Your answer: C was incorrect. The correct answer was B) With the cash basis, revenues and expenses relating to the equipment are generally recognized in different periods. With the cash basis of accounting, revenues are recognized when cash is collected and expenses are recognized when cash is paid. Therefore, the cash flows may occur in different periods than when the revenues are actually earned or when the expenses are actually incurred. For example, the purchase of equipment used in a firm’s manufacturing operation may result in an immediate cash outflow but the equipment generates revenues over its useful life. In this case, the revenues and expense are reported in different periods. With the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when incurred, regardless of the timing of the cash flows. With the equipment purchase, the cost of the equipment will be allocated to the income statement (not cash flow statement) over the asset’s life and at the same time, matched with the revenues generated.
A
Which of the following characteristics should worry Kilgore least? was the question. How do a large # of transactions to a subsidiary worry her the least? and where did they say the results were audited?
planner Wrote: ------------------------------------------------------- > Yes…B. I’m done with adj’s for the day. I try > to do 10 adj’s and an ethics vignette or two every > morning…trying to get things to stick. > I don’t like this adj’s questions very much. Some of them are pretty clear and I think i understood it, but then there are a lot of questions where I have to guess. Same in Ethics. This can be really nasty…
On the very first I got it right but only after my initial calc didn’t yield any of the correct answers because I chose to leave out the amortization charge. Why do we exclude that one from the normalized earnings?