The following summarised balance sheets (years ending 31 December) are presented for Zippy Software, a firm established in 2010 to develop office administration software. The firm went public via an IPO in 2011. All numbers are in $000's. 2013 2014 2015 Current Assets: Cash Receivables 70,000 42,000 26,000 138,000 40,000 62,000 30,000 132,000 16,000 70,000 32,000 118,000 Inventory Non-current Assets Plant & Equipment (net) 86,000 90,000 96,000 Capitalised Research & Development 64,000 150,000 288,000 84,000 174,000 306,000 105,000 201,000 319,000 Current Liabilities: Accounts Payable Debt 26,000 180,000 36,000 180,000 42,000 180,000 Non-current Liabilities Owners Equity Contributed capital Retained earnings 30,000 52,000 288,000 30,000 60,000 306,000 30,000 67,000 319,000 10,000 10,000 Dividends paid 10,000 The only changes in the retained earnings balance are for the addition of annual income and the payment of dividends (as indicated). During 2014 and 2015, Zippy's share price increased from $2.00 to $3.50, while the corresponding increase in the market index was approximately 30%. However, while the market has risen slightly during 2016, Zippy's share price has fallen from $3.50 to $2.20. One of your friends who happens to be a senior manager at Zippy tells you she is puzzled by this. How can a firm with a sound track record of earnings growth and steady dividends suddenly be "punished" by the market. Your friend mentions that she saw a securities analyst on a website state that since the release of the 2015 financial results, the market views Zippy as having a "low quality of earnings". She is puzzled by this term. Required: 1. Explain to your friend what 'earnings quality' means and why it is important. (4 marks) 2. An analyst believes that Zippy's Capitalised Research & Development cost has been impaired and should be written down by $5 million. Assuming 30% tax rate, please list all the adjustments to accounting numbers to recognize the impairment. (6 marks)