The Regina Company once marketed a successful line of vacuum cleaners, but then ran into trouble and failed. As you can see from the income statements below, the firm had dramatic sales growth during the 1980s.

Using the income statements and balance sheets below, track operating income (after tax), free cash flow, changes in net operating assets, and asset turnovers over the period. Use a tax rate of 39 percent.

a. For 1988, calculate normalized operating income. What does this number tell you about the earnings quality in 1988?

b. What do the changes in asset turnover tell you about earnings quality in each of the years?

c. What detail in the statements raises further redflags?

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Liabilities and Stockholders' Equity Current liabilities Short-term borrowings Current portion of term loan Accounts payable Accruued babilities Income taxes payable S 7,500 3,732 2,707 $00 900 1,250 3,082 4,724 7,344 15,072 13,288 3,800 3,09 3.127 5,468 4,710 2.349 1,145 1,5542,6193,782 S18,131 514,092 14,732 $24,059 23,030 1,400 ,400 Total current iabilities long-term debt: 12,600 0 4,800 14,800 3,900 12,650 Industrial revenue bonds Subordinated note Bank debt Mississippi state debt 5,000 5,000 0 5,941 47,432 0 1975 517,600 i19,800 14,800 19,841 $62,057 685 1,2541,881 Total long-term debt Deferred incometaxes Stackholders' equity Common stock, 5.0001 par value Common stock purchase want 100 ,100 Additional paid-in capital Retained earnings Less: treasury stock, cost 1,499 ,473 8,010 8,018 8,149 0 ,12 5,210 2,315 23,269 0 192) (23 247 247) 2,600 3,503 12,985 $20,087 3.172 38,331 37,513 $43,202 $65,24 118,140 Total stockholders' equity Total iabilities and