The following information was taken from the income statement of ABC Corporation for the year ended December 31, 2015 ABC is a holding company with subsidiaries providing research, development, manufacturing, and marketing of brand name household products Amortization of intangible assets $7,346 Total operating expense $464,904 General and administrative expense $176,868 Research and development $97,230 Restructuring costs and asset write downs $24,444 Selling expense $159,016 $7,346 Cost of goods sold Net revenue $482,342 37 81 $1,275,700 Gross profit $482,342 $793,358 $793,358 Extraordinary gain on extinguishment of debt, net of taxes $2,242 General and administrative expenses $176,868 Gross profit $482,342 Net income $149,284 Income from extraordinary item $2,242 Income from continuing operations $51,476 Income from continuing operations before income taxes $69,328 Income from discontinued operations, net of taxes $97,808 Interest expense Operating income $17,438 Interest income $23,944 Other income, net $41,660 Income from continuing operation before income taxes $69,328 $13,714 Operating $13,714 Interest income $23,944 Net revenues Gross profit $482,342 37 81 $1,275,699 55 round up $1,275,700 $1,275,700 Operating income Gross profit $482,342 Total operating expenses $464,904 $17,438 $17,438 Other income, net $41,660 Provision for income taxes $20,094 Research and development $97,230 Restructuring costs and asset write downs $24,444 Selling expenses $159,016 Gross profit as percent of sales 37 81 Total operating expenses $464,904 Required 1 Consider the item called Restructuring costs and asset write downs What impact did this charge have on ABC's cash flows 2 ABC's income statements over the last three years report research and development expenses averaging $51 3 million per year ABC incurred these expenses to enhance current products and to develop new products in the hope of generating higher future sales GAAP requires that all such costs be expensed in the year incurred Consider the following statement 'Research and development expenditures are really assets because they will benefit the future operations of the firm (that is, lead to higher sales) ' If you agree, suggest an alternative way to account for research and development expenditures rather than expensing them in the year incurred If you disagree, what are your reasons 3 Assume that you are a financial analyst for ABC Your boss has asked you to project next year's net earnings What earnings number from the information provided here would you use as the basis for your projection Why

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Posted on Sep 14, 2024

The following information was taken from the income statement of ABC Corporation for the year ended December 31, 2015. ABC is a holding company with

The following information was taken from the income statement of ABC Corporation for the year ended December 31, 2015.

ABC is a holding company with subsidiaries providing research, development, manufacturing, and marketing of brand name household products.

Amortization of intangible assets=	$7,346
Total operating expense $464,904-General and administrative expense $176,868-Research and development $97,230- Restructuring costs and asset write downs $24,444- Selling expense $159,016= $7,346
Cost of goods sold= Net revenue $482,342/37.81%= $1,275,700 - Gross profit $482,342= $793,358	$793,358
Extraordinary gain on extinguishment of debt, net of taxes	$2,242
General and administrative expenses	$176,868
Gross profit	$482,342
Net income	$149,284
Income from extraordinary item	$2,242
Income from continuing operations	$51,476
Income from continuing operations before income taxes	$69,328
Income from discontinued operations, net of taxes	$97,808
Interest expense= Operating income $17,438+ Interest income $23,944+ Other income, net $41,660-Income from continuing operation before income taxes $69,328= $13,714 Operating	$13,714
Interest income	$23,944
Net revenues= Gross profit $482,342/37.81=$1,275,699.55 round up $1,275,700	$1,275,700
Operating income= Gross profit $482,342- Total operating expenses $464,904= $17,438	$17,438
Other income, net	$41,660
Provision for income taxes	$20,094
Research and development	$97,230
Restructuring costs and asset write-downs	$24,444
Selling expenses	$159,016
Gross profit as percent of sales	37.81%
Total operating expenses	$464,904

Required:

1. Consider the item called Restructuring costs and asset write-downs. What impact did this charge have on ABC's cash flows?

2. ABC's income statements over the last three years report research and development expenses averaging $51.3 million per year. ABC incurred these expenses to enhance current products and to develop new products in the hope of generating higher future sales. GAAP requires that all such costs be expensed in the year incurred. Consider the following statement: 'Research and development expenditures are really assets because they will benefit the future operations of the firm (that is, lead to higher sales).' If you agree, suggest an alternative way to account for research and development expenditures rather than expensing them in the year incurred. If you disagree, what are your reasons?

3. Assume that you are a financial analyst for ABC. Your boss has asked you to project next year's net earnings. What earnings number from the information provided here would you use as the basis for your projection? Why?