Module explains rd accounting and the resulting

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module explains R&D accounting and the resulting financial statement implications. ?fizer has restructured its business several times in an attempt to maintain operating profit. Restructurings typically e two types of costs: severance costs relating to employee terminations and asset write-offs. GAAP grants leeway in how unt for restructuring activities. Should Pfizer expense the severance costs when the board of directors approves the I Pfizer Stock Price I ~====s;;====:s;:====::s;=====:s;;===s;:=:==~ $10 2010 2011 2006 2007 2008 2009 (continued on next page) $30 $25 $20 $15 5-2
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layoffs? Or when the employees are actually paid? Or at some other point? This module discusses accounting for restructur- ings, including footnote disclosures that can help financial statement readers interpret restructuring activities. A necessary part of operations is paying income taxes on profits earned. The IRS has its own rules for computing taxes owed. These rules, called the Internal Revenue Code, are different from GAAP. Thus, it is legal (and necessary) for companies to prepare two sets of financial reports, one for shareholders and one for tax authorities. In this module, we will see that tax expense reported on the income statement is not computed as a simple percentage of pretax income. The module also discusses the valuation allowance that is related to deferred tax assets, and explains how the allowance can markedly affect net income. Earnings per share (EPS) is the most frequently quoted operating number in the financial press. It represents earnings that are available to pay dividends to common shareholders. Companies report two EPS numbers: basic and diluted. The latter represents the lower bound on EPS. It is important that we understand the difference between the two, and this module describes the two EPS computations. Pfizer does business around the world, transacting in many currencies. Indeed, many of Pfizer's subsidiaries maintain their entire financial records in currencies other than the U.S. dollar. Consequently, to prepare its financial statements in $US, Pfizer must translate each transaction from foreign currencies into $US. This module describes the effects of foreign currency translation. When the dollar strengthens and weakens against other world currencies, a company's foreign rev- enues and expenses increase or decrease in $US value even if unit volumes remain unchanged. It is important to under- stand the mechanical relation between foreign exchange rates and income statement items if we are to properly analyze companies with global operations. This module considers these issues. (continued from previous page I. Sources: Pfizer 2010 10-K, Pfizer 2010 Annual Report; Fortune, January 2009; Business Week, January 2009. 03: :DO G)C l>e Zr m .~ N l> -I Revenue Recognition and Operating Income o Z Revenue and its Recognition Research and Development Expenses Restructuring Expenses and Incentives Income Tax Expenses and Allowances Foreign Currency Translation Operating Components Below- The-Line Discontinued Operations Extraordinary Items (Gains and Losses)
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