 # Q: adjust capitalized expense back in NI&asset

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 ---------------------------------------------------------------------------- C "under US GAAP, development cost should be expensed in happened year. ROA=(225-25+10)/(1875-25/2)=11.3%. But The answer 11.2%, since 1875 is ave. asset, so minus 25/2 for ave in denominator. But not sure. if minus 25 indenominator, the result is even far from answer. previous year’s expense amortization won’t affect CFO=290-25=265.

up

can some one look at this?

ROA = 210 / 1,875 = 11.2%. CFO would be lower by the amount spent on development 290 - 25 = 265 million.

yancey Wrote: ------------------------------------------------------- > ROA = 210 / 1,875 = 11.2%. CFO would be lower by > the amount spent on development 290 - 25 = 265 > million. the capitalized expense 25M should be removed from Asset (1875M). what’s the logic of your calculation for denominator?

is answer D? CFO = 290 -25 + 10 and ROA 210/1875

previous years amort expense shouldn’t affect this year CFO. so answer should be C… whatever. i am screwed.

Guys, just working on this problem… I think this 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

Can anyone have a look at this? above there is my explanation

Stragedays, following your logice Ave. Total Asset: 1875-25+10=1860 Net Income= 225-25+10=210 ROA= 210/1860=11.29%

Have a look at this http://www.analystforum.com/phorums/read.php?11,715582

11.29% for ROA is what I got, don’t know what to do with CFO.

strangedays Wrote: ------------------------------------------------------- > Daj Have a look at this > http://www.analystforum.com/phorums/read.php?11,715582