上海对外贸易学院财管中加财务报表分析课后练习答案cha2

2.{S}a. (All data in $ millions)

Under the completed contract method, neither

revenue nor pre-tax income would be reported until

the project is completed. When the project has been

completed, at the end of 2002, LASI Construction

would report revenues of $3.0 and pretax income of

$0.6 (revenues of $3.0 minus costs of $2.4).

Under the percentage-of-completion method,

revenues and pretax income must be reported each year

as follows:

b. Computation of construction in progress and advance

billings (in $ millions)

Balance Sheet on December 31, 2000 (in $ millions)

c. Effect on 2001 revenue and pretax income of a change in estimated costs to complete There is no change in 2001 revenues and pretax income (both are $0.000)

under the completed contract method because no revenue or income can be recognized prior to completion. Under the percentage-of-completion method, both revenue and pretax income change and are computed as follows: Note : All changes are in bold. The change in

estimated costs to complete raises the total

expected costs to complete to $2.500 from the

previous estimate of $2.400. Costs incurred at the

end of Year 2001 are $1.700 ($0.900 in 2000 and $0.800

in 2001) because we have assumed that the incremental

costs ($0.100) will be incurred in Year 2002.

Cumulative revenue of $2.040 must be recognized at

the end of 2001; since we recognized $1.125 in

revenue in 2000, the difference ($2.040-$1.125) or

$0.915 must be recognized in 2001. The effect of the

change is recognized in Year 2001 and Year 2000

results are not changed.

13.{M}a. The settlement with the Internal Revenue Service

(IRS) and the reversal of previous year's writeoffs

are not related to the company's 1994 performance.

The IRS settlement dates back to a 1985 event and

the interest earned thereon is related to the 1985

- 1994 period, not 1994 alone. Similarly, the $49

million reversal of pretax income is a correction

of an incorrect estimate made in 1992 and 1993 and

certainly does not relate to 1994 performance. If

we eliminate these amounts, after tax income would

be reduced by $51 million:

Elimination of IRS settlement $ 21 million

Elimination of restructuring reversal* 30

$ 51 million

* From the IRS settlement we estimate tax rate of (1 - $21/$33

=) 38% Therefore, $49 million equals $30 million net of tax) Adjusted Net Income = $622 - $51 = $571

Note: No adjustment is required for equity as these

amounts relate to prior years and they should be

incorporated in equity in those previous years.

Adjusted ROE = $571 = 19.7%

$2,902

If these adjustments are made then the "annual

incentive award of achieving or exceeding a net

income goal" would likely be reduced as net income

is reduced by 8% or $51 million. Similarly, the

stock options should not be issued as the adjusted

ROE of 19.7% is less than 20%.