b A company is experiencing disappointing sales and as a result expects to

B a company is experiencing disappointing sales and

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b. A company is experiencing disappointing sales and, as a result, expects to report disappointing earnings at the end of this quarter. c. A company plans to report especially strong earnings this quarter. d. Management believes the consensus forecast of analysts is slightly higher than managers’ forecasts. 16
e. Management strongly believes the company is undervalued at its current stock price. 4. What are the two basic economic concepts of income? What implications do they have for analysis 5. Distinguish between operating and nonoperating income. Cite examples of items that are typically included in each category. 6. What is meant by earnings quality? Why do users assess earnings quality? What major factors determine earnings quality? 7. A former Chairman of the SEC refers to hidden reserves on the balance sheet as “cookie- jar” reserves. These reserves are built up in periods when earnings are strong and drawn down to bolster earnings in periods when earnings are weak. Required: Reserves for (1) bad debts and (2) inventory, along with the (3) large accruals associated with restructuring charges, are transactions that sometimes yield hidden reserves. a. For each of these transactions, explain when and how a hidden reserve is created. b. For each of these transactions, explain when and how a hidden reserve is drawn down to boost earnings 8. Emerson Electric is engaged in design, manufacture, and sale of a broad range of electrical, electromechanical, and electronic products and systems. The following shows Emerson’s net income and net income before extraordinary items for the past 6 years (in millions): Net Income Y1 200M Y4 240M Y2 220M Y5 260M Y3 221M Y6 280M Required: a. What earnings strategy do you think Emerson has applied over the years to maintain its record of earnings growth? b. Describe the extent you believe Emerson’s earnings record reflects business activities, excellent management, and/or earnings management. c. Describe how Emerson’s earnings strategy is applied in good years and bad. d. Identify years where Emerson likely built hidden reserves and the years it probably drew upon hidden reserves. 17
TUTORIAL 8 1. How does accounting define an extraordinary item? Cite three examples of such an item. What are the analysis implications of such an item? 2. Describe the accounting treatment for discontinued operations. How should an analyst treat discontinued operations? 3. Discuss the accounting standards that govern R&D costs. What are the disclosure requirements? 4. Many companies report discontinued operations in their income statements and balance sheets. Required: 18
a. What is your best estimate of the summary journal entry recording the disposal of discontinued operations. b. Discuss the importance of discontinued operations in analyzing a company’s financial statements.

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