# FSA Question

I want to see if everybody else thought the same thing as I did… 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) \$414.68 million. B) \$480.60 million. C) \$598.60 million. D) \$325.52 million.

D Not sure if I did this right but: \$354.2 + \$23.4 - \$118 = \$259.6 Pre Tax Income = \$259.6/(1-.36) = \$405.63 \$405.63 + \$78.1 + \$24.9 = \$508.63 \$508.63 * (1-.36) = \$352.52

I agree with D. However I’m not sure why amortization charge is considered nonrecurring…? I would have been tempted to leave it in, but I didnt’ find another choice I liked better.

i got D too, although luckily my original answer wasn’t there. i make so many simple errors i.e. calculated one part wrong (simple arithmetic, NOT conceptual)… anyways, here’s how i did i. add-back the pre-tax items adjusted for (1-t)… i.e. multiply by (1-t)… then adjust straight-forward for after-tax items. so 4 adjustments. two of them that require tax adj. i don’t quite understand how the person ahead of me got it, but that’s part of CFA study, i think there are more than one way to skin the cat. i just find CFA so imprecise in the way they answer questions. college accounting exams were so much richer on the content side. sometimes, i don’t even know if CFA totally understands the questions as they put them.

i got the right answer, but wasn’t certain why interest expense wasn’t there. maybe it was zero another cfa complaint is that they seem to the same thing different ways in different sections. do we really need to learn 10 similar ways to do cash flow??

I was not going to not include amortization either but I could not find an answer there without it. So I included it. If one of the options was \$309.59, I would have went with that one.

Congrats all… I now see where I was messing this up… ANS: 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.

wanderingcfa, that’s pretty much how i feel. so often i get the right answer on multiple choice, but i wouldn’t have if it was free form. also, is there one set definition of normal operating cash flow? (was that how they phrased it??) i seriously see that whole converting different NI/CF measures to each other as a very important section. 100% they have alot of questions on that.

wanderingcfa Wrote: ------------------------------------------------------- > I was not going to not include amortization either > but I could not find an answer there without it. > So I included it. > > If one of the options was \$309.59, I would have > went with that one. agreed…i calculated it without the amortization adjustment…and got 309.59 too…but the option wasn’t there…so i didn’t know what I had missed… is this in the CFAi text?? this is confusing…why should you consider amortization a non-recurring item to get to normalized earnings… …

mumukada Wrote: ------------------------------------------------------- > wanderingcfa Wrote: > -------------------------------------------------- > ----- > > I was not going to not include amortization > either > > but I could not find an answer there without > it. > > So I included it. > > > > If one of the options was \$309.59, I would have > > went with that one. > > > > agreed…i calculated it without the amortization > adjustment…and got 309.59 too…but the option > wasn’t there…so i didn’t know what I had > missed… > > is this in the CFAi text?? this is confusing…why > should you consider amortization a non-recurring > item to get to normalized earnings… … Agreed…why was amortization added back? Can’t understand that part. Everything else looks fine.

Is it because Operating Earnings is EBITDA? Impairment Loss and Amortization are Pre-Tax numbers - so After tax component of those is added back. Early debt retirement and the Insurance claim after After-tax numbers - so they are added back straight? I am guessing here. CP

cpk123 Wrote: ------------------------------------------------------- > Is it because Operating Earnings is EBITDA? > > Impairment Loss and Amortization are Pre-Tax > numbers - so After tax component of those is added > back. > > Early debt retirement and the Insurance claim > after After-tax numbers - so they are added back > straight? > > I am guessing here. > > CP you might be right…they’re not just asking for normalized earnings, but normalized operating earnings in the question…i hate these little tricks…buggers…