This measurement error is difficult to estimate and

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's profit is not as low.This measurement error is difficult to estimate and, thus, many analysts adjust balance sheets and income statements for write-downs. At a minimum, however, we recognize the qualitative implications of restructuring costs for the profitability of recent prior and the current period. .:UoIALYSISDECISION~. You Are the Financial Analyst ou are analyzing the 10-K of a company that reports a large restructuring expense, involving ployee severance and asset write-downs. How do you interpret and treat this cost in your analy- - of the company's current and future profitability? [Answer, p. 5-38]
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5-19 Module 5 I Revenue Recognition and Operating Income L03 Explain and analyze accounting for income taxes. MID-MODULE REVIEW 1 Merck & Co., Inc., reports the following income statements for 2008 through 2010. [ ($ in millions) 2010 2009 2008 $27,428 $23,850 9,019 5,583 8,543 7,377 5,845 4,805 1,634 1,033 (2,235) (2,561) (10,668) (2,318) 12,138 13,919 -- 15,290 9,931 2,268 1,999 --- $13,022 $ 7,932 Sales . Costs, expenses and other Materials and production .................... •.. Marketing and administrative . Research and development . Restructuring costs . Equity income from affiliates . Other (income) expense, net . $45,987 18,396 13,245 10,991 985 (587) 1,304 44,334 1,653 671 Income before taxes . Taxes on income . Net income . $ 982 Required 1. Merck's revenue recognition policy, as outlined in footnotes to its lO-K, includes the fol- lowing: "Revenues from sales of products are recognized when title and risk of loss passes to the customer." Evaluate Merck's revenue recognition policy. 2. Merck's research and development (R&D) efforts often require specialized equipment and facilities that cannot be usedfor any other purpose. How does Merck accountfor costsrelated to this specialized equipment and facilities? WouldMerck account for these costs differently if they had alternate uses? Explain. 3. Merck reports restructuring expense each year.What are the general categories of restructur- ing expenses? How do accrual accounting and disclosure requirements prevent companies from intentionally overstating restructuring expenses in one year (referred to as taking a "big bath") and reversing the unused expenses in a future year? The solution is on page 5-60. Income Tax Expenses and Allowances Companies prepare financial statements for shareholders using GAAP. When these companies file their income tax returns, they prepare financial statements using the Internal Revenue Code (IRe - These two different setsof accountingrules recognize revenues and expenses differentlyin many cases and, as a result, can yield markedly different levels of income. In general, companies desire to report lower income to taxing authorities than they do to their shareholders so that they can reduce their tax liability and increase after-taxcash flow.This practice is acceptable so long as the fmancial statements are prepared in conformity with GAAP and tax returns are filed in accordance with the IRe.
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