Question 1

Product returns and warranties are nonoperating provisions that do not affect NOPLAT.

Accepted Answer

Warranties are operating provisions, and they reduce NOPLAT.

Question 2

The size of a nonoperating expense or one-time charge mentioned in a management discussion and analysis (MD&A )note might determine if it should be included in the adjustment to NOPLAT.

Accepted Answer

The size of a nonoperating expense or one-time charge mentioned in a MD&A note can be a factor in determining whether it should be included in the adjustment to NOPLAT.

Question 3

Provisions for the sole purpose of income smoothing should be treated as an equity equivalent.

Accepted Answer

Provisions for the sole purpose of income smoothing are not a liability and should be treated as an equity equivalent.

Question 4

All of the following are related to the ongoing core business EXCEPT:&#10;A)Royalty expense.&#10;B)Restructuring charges.&#10;C)Selling,general,and administrative (SG&A )expenses.&#10;D)R&D expenses.

Accepted Answer

Restructuring charges are usually one-time expenses related to the company's efforts to improve its operations, reduce costs, or adjust to changing market conditions. They are not ongoing expenses related to the company's core business activities.

The other options are all expenses that are directly related to the ongoing core business:

- Royalty expenses are payments made to a third party for the right to use their intellectual property, such as patents or trademarks, in the company's products or services. 
- SG&A expenses are the costs of operating the company's day-to-day operations, such as rent, salaries, utilities, and marketing expenses. 
- R&D expenses are incurred to develop and improve the company's products or services, which are part of its ongoing core business activities.

Question 5

With respect to the treatment of goodwill in the analysis of a company and determining the return on invested capital (ROIC),which of the following is most accurate?&#10;A)Treat goodwill impairments as operating and subtract cumulative impairments from goodwill on the balance sheet.&#10;B)Treat goodwill impairments as operating and add back cumulative impairments to goodwill on the balance sheet.&#10;C)Treat goodwill impairments as nonoperating and add back cumulative impairments to goodwill on the balance sheet.&#10;D)Treat goodwill impairments as nonoperating and subtract cumulative impairments from goodwill on the balance sheet.

Accepted Answer

Goodwill impairments are considered nonoperating because they do not relate directly to the core operations of the business. Adding back cumulative impairments to goodwill on the balance sheet helps in analyzing the company's operational performance without the distortion caused by impairment charges.

Question 6

Which of the following is most accurate concerning plant decommissioning costs and unfunded retirement plans?&#10;A)They are both long-term operating provisions and should be treated as debt equivalents.&#10;B)They are both short-term operating provisions and should be treated as short-term liabilities.&#10;C)They are both long-term operating provisions.Plant decommissioning costs should be treated as a debt equivalent,and unfunded retirement plans should be treated as an equity equivalent.&#10;D)Plant decommissioning costs are not an operating provision and should not be included in value estimation.Unfunded retirement plans are long-term operating provisions and should be treated as an asset.

Accepted Answer

Plant decommissioning costs and unfunded retirement plans are both long-term obligations that a company must eventually pay. Therefore, they are often treated as debt equivalents because they represent future cash outflows that the company is obligated to meet, similar to the way debt obligations function.

Question 7

If litigation charges recur frequently and grow with revenue,the analyst should treat the charges as operating.

Accepted Answer

Litigation charges are expenses incurred as part of the normal business operations and are therefore treated as operating expenses. If the charges recur frequently and grow with revenue, it indicates that they are directly related to the company's core business activities and should be considered as part of operating expenses in the income statement.

Question 8

Given the following entries,compute ROIC based on beginning-of-the-year investments.Assume that all invested capital entries are beginning-of-the-year entries and all income statement entries are for the entire year. Reported EBITA = 1,000
Reserve for plant decommissioning = 2,000
Interest associated with plant decommissioning = 200
Reserve for restructuring = 600
Equity = 4,000

A)12.12 percent.
B)14.81 percent.
C)18.18 percent.
D)22.22 percent.

Accepted Answer

ROIC is calculated as Net Operating Profit After Taxes (NOPAT) divided by Invested Capital. NOPAT is EBITA minus taxes, but since tax rate is not provided, we use EBITA directly. Invested Capital is Equity plus reserves that are not operational expenses (plant decommissioning and restructuring reserves are not part of operational invested capital). Thus, Invested Capital = Equity + Reserve for plant decommissioning + Reserve for restructuring = 4,000 + 2,000 + 600 = 6,600. ROIC = EBITA / Invested Capital = 1,000 / 6,600 = 0.1515 or 15.15%. However, given the options provided, it seems there was a mistake in calculation or option interpretation. Correctly, without considering reserves as part of invested capital, it would be 1,000 / 4,000 = 25%. Given the options and the closest approach to correct calculation, the intended correct answer might have been based on a different interpretation of the components of invested capital or a miscalculation. Therefore, based on the provided calculation method, none of the options accurately reflect the correct calculation. However, aiming to match the closest provided option based on the initial calculation approach, 18.18% (C) would be selected if we consider a different interpretation of the calculation, possibly excluding the reserves or considering a different base for the calculation. This highlights a discrepancy in the calculation or the interpretation of the provided options.

Question 9

Which of the following are typical nonoperating expenses?
I.Amortization expense.
II.Restructuring charges.
III.Litigation expenses.
IV.Purchased research and development (R&D).

A)I and II only.
B)I,II,and III only.
C)III and IV only.
D)I,II,III,and IV.

Accepted Answer

Nonoperating expenses are costs that are not directly tied to the primary activities of the business. Amortization expense (I) is related to the gradual charging to expense of the cost of intangible assets over their useful life. Restructuring charges (II) are associated with reorganizing company operations. Litigation expenses (III) are costs related to legal actions, and purchased research and development (R&D) (IV) is an expense related to acquiring new technology or products that is not part of the company's ongoing operations. All these expenses are considered nonoperating because they do not directly relate to the core operations of producing and selling goods or services.

Question 10

List the three recommended steps in assessing the impact of nonoperating expenses and incorporating their information in cash flow forecasts.

Accepted Answer

The answer of List the three recommended steps in assessing...

Deck 19: Non-operating Items, Provisions, and Reserves