Eli Lilly and Company produces pharmaceutical products for humans and animals. Exhibit 6.17 includes a footnote excerpt

Question:

Eli Lilly and Company produces pharmaceutical products for humans and animals. Exhibit 6.17 includes a footnote excerpt from the quarterly report of Lilly for the period ending March 31, Year 5. The firm first adopted Statement No. 123 (Revised 2004) reporting in this quarter.

Required
a. Lilly’s statement of cash flows (not provided in this problem) includes an addback for stock-based compensation in calculating cash flows from operations of $108.2 million for Year 5 and $25.2 million for Year 4. Why does Lilly add stock-based compensation back to net income?
b. Refer to Part a. Lilly’s statement of cash flows includes a cash inflow in the section on cash flows from financing activities of $12.5 million for Year 5 and $46.5 million for Year 4. The amounts are labeled “Issuance of under stock plans.” Who provided these cash inflows to Lilly? In general terms, how are the amounts determined?
c. Lilly states in the note: “Stock options are granted to employees at exercise prices equal to the fair market value of our stock at the dates of grant.” Discuss why Lilly structured the stock option grants this way.
d. The note reports $397.5 million of remaining unrecognized compensation cost related to nonvested stock options. What portion of this amount will be reported as compensation expense in the second quarter ending June 30, Year 5? Does this amount represent total stock-based compensation expense for the quarter?
e. Prior to Statement No. 123 (Revised 2004), firms were required to report pro forma earnings per share, taking into consideration stock-based compensation. As discussed in the chapter, Statement No. 123 (Revised 2004) requires stock-based compensation to be reported in the income statement, and thus included in the calculations of reported earnings per share. In addition to properly following (that is, Statement No. 123 Revised 2004), many firms present non- earnings numbers before deducting the effects of stock compensation as a supplemental disclosure in their annual reports (which is comparable to the old reported earnings number before 123R). Why do companies do this? Which earnings number is more meaningful, net income or this non- measure?
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