Help with number 1 please

AT&T: Business acquisitions and analysis of sales growth (LO 17-5)

The disclosure rules for business combinations complicate financial analysis. Trend analysis becomes difficult because comparative financial statements are not retroactively adjusted to include data for the acquired company for periods prior to the acquisition.

For example, consider AT&Ts acquisition of DirecTV in 2015. The following disclosure appeared in AT&Ts management discussion and analysis in its 2016 Form 10-K:

Operating revenues increased $16,985, or 11.6%, in 2016 and $14,354, or 10.8%, in 2015.

Service revenues increased $17,207, or 13.1%, in 2016 and $13,240, or 11.2%, in 2015.

The increase in 2016 was primarily due to our 2015 acquisition of DIRECTV and increases in IP broadband and fixed strategic service revenues. These were partially offset by continued declines in our legacy wireline voice and data products and lower wireless revenues from offerings that entitle customers to lower monthly service rates. The increase in 2015 was primarily due to our acquisition of DIRECTV, our new wireless operations in Mexico, and gains in fixed strategic services and our IP-based AT&T U-verse(U-verse) services.

In the notes to the financial statements, AT&T provided pro forma income statement information as if the DirecTV acquisition had been completed on January 1, 2014:

Dollars in millions except per share amounts

For the 160-day period ended December 31, 2015, our consolidated statement of income included $14,561 of revenues and $(46) of operating income, which included $2,254 of intangible amortization, from DIRECTV and its affiliates. The following unaudited pro forma consolidated results of operations assume that the acquisition of DIRECTV was completed as of January 1, 2014.

Required:

1. How should a financial statement user interpret the reference to 13.1% revenue growth for 2016 disclosed by AT&T?

Suppose you are asked to prepare a sales forecast for 2017. Based on the information provided, what is the best estimate of AT&Ts sustainable growth in revenues for the next several years? Explain your answer.

(2.7) Percent Change Sin millions) 2016 2015 2014 2016 vs. 2015 2015 vs. 2014 Operating Revenues Service $148.884 131,677 $118.437 13.1% 11.2% Equipment 14,902 15.124 14,010 (1.5) 8.0 Total Operating Revenues 163.786 146,801 132,447 11.6 10.8 Operating Expenses Cost of services and sales Equipment 18.757 19.268 18,946 1.7 Broadcast, programming and operations 19.851 11.996 4.075 65.5 Other cost of services 38.276 35.782 37. 124 7.0 (3.6) Selling, general and administrative 36,347 32.919 39,697 10.4 (17.1) Asset abandonments and impairments 361 35 2120 (983) Depreciation and amortization 25.847 22,016 18.273 17.4 20.5 Total Operating Expenses 139,439 122.016 120.235 Operating Income 24.347 24.785 12.212 (1.8) Interest expense 4.910 4.120 3.613 19.2 14.0 Equity in net income of affiliates 98 79 175 24.1 (54.9) Other income (expense --net (52) 1.581 Income Before Income Taxes 19.812 20,692 10.355 (4.3) 99.8 Net Income 13,333 13.687 6,736 (2.6) Net Income Attributable to AT&T $ 12,976 $13,345 $ 6.442 (2.87% 14.3 1.5 277 (2.7) Percent Change Sin millions) 2016 2015 2014 2016 vs. 2015 2015 vs. 2014 Operating Revenues Service $148.884 131,677 $118.437 13.1% 11.2% Equipment 14,902 15.124 14,010 (1.5) 8.0 Total Operating Revenues 163.786 146,801 132,447 11.6 10.8 Operating Expenses Cost of services and sales Equipment 18.757 19.268 18,946 1.7 Broadcast, programming and operations 19.851 11.996 4.075 65.5 Other cost of services 38.276 35.782 37. 124 7.0 (3.6) Selling, general and administrative 36,347 32.919 39,697 10.4 (17.1) Asset abandonments and impairments 361 35 2120 (983) Depreciation and amortization 25.847 22,016 18.273 17.4 20.5 Total Operating Expenses 139,439 122.016 120.235 Operating Income 24.347 24.785 12.212 (1.8) Interest expense 4.910 4.120 3.613 19.2 14.0 Equity in net income of affiliates 98 79 175 24.1 (54.9) Other income (expense --net (52) 1.581 Income Before Income Taxes 19.812 20,692 10.355 (4.3) 99.8 Net Income 13,333 13.687 6,736 (2.6) Net Income Attributable to AT&T $ 12,976 $13,345 $ 6.442 (2.87% 14.3 1.5 277