Answers
ANSWERS TO QUESTIONS
1. Sustainable income is defined as the most likely level of income to be obtained in the future. It is the amount of regular income that a company can expect to earn from its normal operations. In order to distinguish a company’s net income from its sustainable income, irregular items, such as a once-in-a lifetime gain or discontinued operations, are reported separately on the income statement.
2. Items (a), (d), and (g) are extraordinary items; item (h) is debatable.
3. This would not be considered a favorable trend for McDonell Inc. The relevant earnings per share figures are the $3.26 in 2009 and the $2.99 in 2010. These figures indicate that, unless there was a sale of common stock, the earnings from the continuing operations of the company decreased during 2010. This should give the company’s management some concern because they will not always be able to count on revenue or gains from irregular items.
4. Companies report a change from FIFO to average cost pricing for inventory retroactively. That is, they report both the current period and any previous periods reported on the face of the statement using the new principle. As a result, the same principle applies in all periods. This treatment improves the ability to compare results across years.
5. Tootsie Roll reported “Other comprehensive earnings” of $810,000 in 2007. “Comprehensive earnings” exceeded “Net earnings” by 1.6% [($52,435 – $51,625) ÷ $51,625]
6. (a) Andrea is not correct. There are three characteristics: liquidity, profitability, and solvency.
(b) The three parties are not primarily interested in the same characteristics of a company. Short- term creditors are primarily interested in the liquidity of the enterprise. In contrast, long-term creditors and stockholders are primarily interested in the profitability and solvency of the company.
7. (a) Comparison of financial information can be made on an intracompany basis, an
1. Sustainable income is defined as the most likely level of income to be obtained in the future. It is the amount of regular income that a company can expect to earn from its normal operations. In order to distinguish a company’s net income from its sustainable income, irregular items, such as a once-in-a lifetime gain or discontinued operations, are reported separately on the income statement.
2. Items (a), (d), and (g) are extraordinary items; item (h) is debatable.
3. This would not be considered a favorable trend for McDonell Inc. The relevant earnings per share figures are the $3.26 in 2009 and the $2.99 in 2010. These figures indicate that, unless there was a sale of common stock, the earnings from the continuing operations of the company decreased during 2010. This should give the company’s management some concern because they will not always be able to count on revenue or gains from irregular items.
4. Companies report a change from FIFO to average cost pricing for inventory retroactively. That is, they report both the current period and any previous periods reported on the face of the statement using the new principle. As a result, the same principle applies in all periods. This treatment improves the ability to compare results across years.
5. Tootsie Roll reported “Other comprehensive earnings” of $810,000 in 2007. “Comprehensive earnings” exceeded “Net earnings” by 1.6% [($52,435 – $51,625) ÷ $51,625]
6. (a) Andrea is not correct. There are three characteristics: liquidity, profitability, and solvency.
(b) The three parties are not primarily interested in the same characteristics of a company. Short- term creditors are primarily interested in the liquidity of the enterprise. In contrast, long-term creditors and stockholders are primarily interested in the profitability and solvency of the company.
7. (a) Comparison of financial information can be made on an intracompany basis, an