Stalla #17 on page 7-51, Book 2 (2006 version) “To determine the quality of a firm’s earnings, one factor to analyze is the recurring or non-recurring nature of various income components. Which of the following items should be considered in predicting a firm’s future earnings performance? a. A loss, which resulted from an expropriation of the firm’s assets located in a foreign country. b. A gain on the sale of a discontinued segment. c. A loss reported by a clothing store due to style (fashion) changes. d. A loss that resulted from an employee strike.” My answer: A Thoughts: If Argentina takes over your oil field that is a significant source of earnings your future earnings are going to be impacted similarly. Same holds (I would think) for a factory, etc. Stalla answer: C Explaination (paraphrase): This type of loss can be recurring and should be considered when computing future earnings performance. Is this a badly worded question & answer, or am I missing something here? My response would be that the clothing store would probably change its merchandise and at least have a chance to maintain earnings in the future. The firm losing its assets to a foreign government, on the other hand, would absolutely lose “future earnings performance.” The only thing I can think of here is that they are referring to the loss of the asset itself (they can only take the oil field away form you once, you can “miss” on fashion over and over)… though the question seems to indicate otherwise.
I believe as someone else said 1. This is a badly worded question. 2. Eliminate all the other possibilities Loss due to expropriation in a foreign country is NON Recurring Gain on sale of DISCONTINUED Segment is NON Recurring Employee strike, you would imagine is one time. Given all other choices have been eliminated - Fashion change loss remains the plausible answer.
A is not a good answer because it does not matter if the effects are continous but if the event itself is recurring although a strike, discontinuing a line and expropriation might happen again it is wrong to assume that they will every year but we all know that fashion changes every year so it’s fairly decent to assume that gains/losses (more likely) will happen again