A current exposure draft requires companies to recognize the fair value of employee stock op-tions as an operating expense. Options pricing models are used to estimate the fair value of the options. Under current GAAP, companies have the choice to provide footnote disclosure of pro forma effects on net income of the costs of employee stock options.

Required:

a. Discuss whether an analyst would have a preference for recording ESO costs in the body of the income statement or disclosing the pro forma effect of ESO costs in the footnotes.

b. If you are analyzing an annual report that footnotes ESO effects on net income describe how you can use the pro forma disclosures to recast your analysis for the impact of employee stock options.

c. Identify at least four ratios in your financial analysis that are impacted by the recognition or nonrecognition (footnoting) of ESO cost.