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hw8fsae.doc-Eighth Homework 1. Assume that a
hw8fsae.doc-Eighth Homework 1. Assume that a
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hw8fsae.doc-Eighth Homework 1. Assume that a
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Eighth Homework
1.
Assume that a firm has an asset write down of $3,000,000 after concluding that
the value of a building is only $4,000,000 instead of $7,000,000.
Why might an analyst
or other user want to adjust for that asset write down when looking at the firm’s income
this year?
Also, why will that asset write down lead to higher income in future years?
2.
Identify which of the following unusual items (it could be more than one) are
already presented net of tax so one does not need to adjust for tax to remove that item:
asset write downs, discontinued operations, restructuring charges, gains on repurchasing
debt, and merger-related costs.
3.
Use the financial statements for the Hershey Company to answer this question.
Calculate earnings before unusual items for the Hershey Company.
Earnings before
unusual items is the after-tax income that the Hershey Company would report if it did not
report any atypical items in that fiscal year.
For the Hershey Company, the atypical item
is business realignment and impairment charges.
4.
Use the Hershey Company’s financial statements to answer this question. Assume
that the Hershey Company managed its earnings in 2016 by selecting an inappropriately
high allowance for doubtful accounts for its accounts receivable. Assume that the
Hershey Company uses the percentage of accounts receivable approach to estimate its
allowance for doubtful accounts and that the appropriate assumed default rate for 2016 is
the default rate that The Hershey Company used in 2015.
(a) Recalculate the allowance for doubtful accounts for 2016 using the appropriate
(unmanaged) percentage.
(b) Calculate earnings before taxes for the Hershey Company using the re-estimated
allowance for doubtful accounts.
You should ignore the adjustments you made in
question 3 in answering this question. If the Hershey Company was managing its income
then this income number might be more indicative of the true profitability of the Hershey
Company.
.


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