© 2000 John Petroff
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© 2000 John Petroff |
Assignments, Cases & Exercises
Research assignments:
R-13.1 Visit financial web sites to determine if the internet start-ups (such as Amzon.com) that reported monumental losses in the late 1990's, have finally shown the profits investor hoped for. How many are still in the red. Have investors given up on the latter? In what industry are the loss making start-ups at the time of your writing?
R-13A.1 Read accounting literature that talks about earning distortions in financial statements of American companies in early twentieth century, i.e. before AICPA and SEC intervention in improving corporate information. In particular, list cases where fraud was charged.
R-13A1.1 Read through financial accounting standards and record every instance of more than one method of treating an item of revenue or expense.
R-13A1.2 Take six firms in the same industry. Read the notes to financial statements setting out their accounting policies. Tabulate the methods adopted by each firm. Point out the cases where different methods are used for the same item.
R-13A2.1 Take the same firms as in the previous assignment. Compare the relative size of expenses such as advertisement, research and development, and repair and maintenance. Point out which company earnings are likely to be understated in the current year. For the six firms, record the instances of recognition of cumulative effect of accounting change in the past five years. Conclude whether there are significant distortions between company earnings.
R-13A3.1 Review accounting literature that deals with extraordinary items. Note carefully the justification for switching from the all-inclusive approach to the current-operating-performance approach. Argue whether outside analysts and investors are well served by including back into operating income and expense amounts related to events that are infrequent but by-product of operation, or unusual but recurring. In other words, should such amounts be lumped into an operating income, or left isolated?
R-13A3.2 Return to the same six firms used before. Report on items shown by the six firms that are either from non-continuing operations or extraordinary. Scrutinize the annual report writings to see if any amount related to unusual or infrequent events might have been lumped into operating expenses.
R-13A3.3 Report on the recognition and treatment of extraordinary items in countries other than the United States. Compare to the American approach. Comment on comparability of earnings.
R-13A4.1 Use the same six firms as before. Look for and report instances of income smoothing. Study sizeable write-offs or other income recognition, and investigate if the timing of their presence in the income statement has more to do with the size of reported earnings than its economic justification.
R-13A5.1 Take one of the six firms previously studied; preferably the one with the largest number of distortions. Assume that you must prepare an accurate income statement for a group of investors that are interested in acquiring the company, but want a truthful income statement. Carry out all possible corrections explaining each in detail. (Make assumptions where necessary.)
R-13B1.1 Continue with the six firms used before. Prepare a schedule showing the income statements of all six firms side by side. Argue which absolute measure of income is the most representative of actual performance: net after tax, before tax, before tax and extraordinary items, from continuing operations, before interest and taxes, or before interest, taxes and non cash expenses.
R-13B2.1 Investigate how earnings per share were calculated in the past. Find the reasoning presented in accounting literature for showing diluted earnings per share and fully diluted earnings per share, and for the reasoning of abandoning the fully diluted earnings per share calculation.
R-13B2.2 Report on how earnings per share are calculated in other countries than the United States. Compare and comment.
R-13C.1 Review the management preoccupations presented in the section on earnings power by researching literature on financial and strategic management. Verify the presence of conflicts between these goals by taking each item of expense and determining its impact on each goal.
R-13C8.1 Conduct a comparative study of corporate tax burden among major countries (with the help of country profile booklets published by major auditing firms such as Price Waterhouse Coopers and Ernst & Young). Comment on the comparability of income statements of firms from different country because of the presence of certain tax amounts in general expenses rather than in income tax.
R-13C8.2 Return to the six firms previously used. Present a comparison of the temporary and permanent deferred tax liabilities and assets of the six firms, and use it to catalogue the most common type of deferred income tax in the industry. Comment on the potential impact on comparison between the firms caused by some the largest deferred income tax components. Also comment whether these schedules revealed any event no initially suspected from other reading of a company's annual report.
R-13C12.1 Obtain annual reports of a company for the past fifty years. Clean through them to observe and record the evolution of management's discussion of results. Report the chronology of improvements in writings.
R-13C12.2 Using the same annual reports as in the previous question, find instances of clear management statements about plans for the future. Then trace in subsequent annual reports, if the plans came to fruition. Conclude about the difficulty (or danger) of making forward looking statements and the usefulness of warnings presently incorporated in annual reports.
R-13C12.3 Review the evolution of SEC disclosure requirements in the written part of corporate annual reports. Show the progress. Offer suggestions for further improvements.
Cases for Chapter 13 Earnings:
Study the performance of KV Pharmaceutical Company in 1998
and 1999 in particular in Case -
KVa. Review the commercial strategy and the evolution of the
market. Comment on the quality of earnings by analyzing the different
expense items. Can the performance be duplicated in the future?
Why is Jenny Craig so concerned with its small loss of 1999 presented in Case -JC? Is the weight control market contracting or growing? What are the dominant companies in the industry? What is the potential for Jenny Craig in this market? How important are the law suits pending against Jenny Craig and the other co-defendants in connection with Redux and phen-fen? Will Jenny go bankrupt as a result (the way Monsanto did)? Make earnings predictions for year 2000 and after.
Make a detailed statistical analysis of ProBusiness revenue
and expense patterns in the late 1990's based on information in
data and links of Case - PRBZ.
Study company plans and recognition of risk factors in its management
discussion and analysis of results of operations and financial
conditions. Using these elements, construct a pro forma income
statement and balance sheet for year 2000. Comment on whether
the percent-of-sales method gives an adequate forecast. Offer
an estimate of forecast error.
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