oct19pre (2) - Todays Topic: Earnings Quality and Income...

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Unformatted text preview: Todays Topic: Earnings Quality and Income Classification Issues (continued): PRO FORMA EARNINGS Cisco offered the following reconciliation ($ in millions): GAAP loss $(2,693) Add: Restructuring costs and other special charges $ 1,170 In-process research and development 109 Amortization of goodwill and other acquisition costs* 346 Payroll tax on stock options exercised 10 Inventory charges 2,249 Total adjustments $ 3,884 Tax effects (approximately 24.7% tax rate) (961) Net of tax adjustments $2,923 Pro forma net income $ 230 *New accounting standards discussed in Chapters 10 and 11 require that goodwill no longer be amortized. This standard became effective after August of 2001. THREATS TO EARNINGS QUALITY: MANIPULATING INCOME Two ways to manipulate income: 1. Income statement classification 2. Income shifting (Earnings Management) The most common income statement classification manipulation involves the inclusion of recurring operating expenses in special charge categories such as restructuring costs and impairment writedowns . Restructuring Costs Costs associated with shutdown or relocation of facilities or downsizing of operations are recognized in the period incurred. Goodwill Impairment and Long-lived Asset Impairment Involves asset impairment losses or charges. When are restructuring costs recognized? How would you classify restructuring costs in the companys income statement? What factors would you consider in determining whether or not restructuring costs should be included in an assessment of a companys permanent earnings? THREATS TO EARNINGS QUALITY: MANIPULATING INCOME Two ways to manipulate income: 1. Income statement classification 2. Income shifting (Earnings Management) INCOME SHIFTING (EARNINGS MANAGEMENT) Income Smoothing Big Bath Cookie Jar Reserves Accelerating or Decelerating Revenue Recognition (in Chapter 5) Income Smoothing Big Bath Cookie Jar Reserves Connection with conservatism? Case 4-6 Carter Hawley Hale Stores (CHHS), Inc. was one of the largest department store retailers in the United States. At the end of fiscal 1989, the company operated 113 stores in the sunbelt regions of the country. The company's divisions included The Broadway, with 43 stores in Southern California and 11 stores in the southwest, and Emporium, with 22 stores in the greater San Francisco Bay Area. On October 17, 1989, a 7.1 Richter scale earthquake caused significant amounts of monetary damage to the San Francisco Bay Area. This was the largest earthquake to hit the Bay Area since the quake of 1906 destroyed much of San Francisco. California is lined with many active earthquake faults. Hundreds of small earthquakes occur each year throughout the state....
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oct19pre (2) - Todays Topic: Earnings Quality and Income...

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