As of December 31, 1994, Safeway Inc., one of the world’s largest food retailers, held a 35% equity interest in Vons, which operated 336 grocery stores located mostly in southern California, and a 49% equity interest in Casa Ley, which operated 70 stores in western Mexico. These investments totaled $329 million on the company’s 1994 balance sheet. In its 1994 annual report Safeway reported that the income recognized on these investments fell from $39.1 million in 1992, to $33.5 million in 1993, to $27.3 million in 1994. These same dollar amounts were subtracted from net income in the operating section of the statements of cash flows for 1992, 1993, and 1994 in the calculation of net cash flow from operations in those three years. REQUIRED:

a. Explain why these three dollar amounts were subtracted from net income in the calcula¬ tion of net cash from operations for 1992, 1993, and 1994.

b. Compute the net income and dividends declared by Vons and Casa Ley in 1992, 1993, and 1994.

c. These dollar amounts were reported on Safeway’s income statements for 1992, 1993, and 1994. In 1992 the $39.1 million of equity income represented almost 90% of the com¬ pany’s earnings. Discuss the “quality” of these earnings amounts from a financial state¬ ment user’s perspective.