Condensed financial statements of General Electric, along with note information

Condensed of General Electric, along with note information regarding postretirement benefits, are shown here:

Note that this postretirement data was reported under the older standard (SFAS 87). The recognition of net position on the balance sheet under the current standard (SFAS 158) is different.

a. Determine the economic position of the postretirement plans for each of 1998 and 1997. Restate the balance sheets and examine the effect of reflecting the true position on key ratios (debt to equity, long-term debt to equity, return on equity).

b. What is economic pension cost for each of 1998 and 1997? Reconcile it with the reported pension expense. Determine the pension expense you would consider when determining GE’s permanent income and economic income.

c. Examine how the current accounting (under SFAS 158) would recognize and report the provided pension and OPEB numbers. In particular, discuss how the net economic position will be featured in the balance sheet with specific reference to how the balance sheet numbers will be articulated with that recognized in the income statement (periodic net benefit cost).

d. Evaluate the key actuarial assumptions. Is there any hint of earnings management?

e. In its editorial, Barron’s hinted GE was using pensions to manage its earnings growth: In 1997, pension income chipped in $331 million of GE’s total earnings of $8.2 billion. In 1998, pension income accounted for $1.01 billion of the company’s total earnings of $9.3 billion. Okay, let’s suppose that there was no contribution to earnings in either years (these are not, in any case, actual cash additions). Minus the noncash contributions from the pension plans, GE’s 1997 net was $7.9 billion; its 1998 net amounted to $8.3 billion. On this basis, the rise in earnings last year was roughly $400 million, or about 5.1%. And 5.1%, while respectable, is a good cut below the 13% the company triumphantly announced . . . GE’s shares, as we observed, are selling at some 40 times last year’s earnings. Do you agree with Barron’s editorial? In what manner, if any, might GE be managing its earnings through pensions?

f. Note the reference to cash flows in the Barron’s editorial—“these are not, in any case, actual cash additions.” Is it true that every earnings effect that does not necessarily have an equal and contemporaneous cash flow effect is tainted in some manner? Answer this question with respect to GE’s pension disclosures. What are the cash flows relating to GE’s postretirement plans? How useful are these cash flows for understanding the economics of postretirement benefit plans—are they more meaningful than the pension expense (income) number?

A current exposure draft requires companies to recognize the fair

A current exposure draft requires companies to recognize the fair value of employee stock op-tions as an operating expense. Options pricing models are used to estimate the fair value of the options. Under current GAAP, companies have the choice to provide footnote disclosure of pro forma effects on net income of the costs of employee stock options.


a. Discuss whether an analyst would have a preference for recording ESO costs in the body of the income statement or disclosing the pro forma effect of ESO costs in the footnotes.

b. If you are analyzing an annual report that footnotes ESO effects on net income describe how you can use the pro forma disclosures to recast your analysis for the impact of employee stock options.

c. Identify at least four ratios in your financial analysis that are impacted by the recognition or nonrecognition (footnoting) of ESO cost.

One means for a corporation to generate long-term financing is

One means for a to generate long-term financing is through issuance of noncurrent debt instruments in the form of bonds.


a. Describe how to account for proceeds from bonds issued with detachable stock purchase warrants.

b. Contrast a serial bond with a term (straight) bond.

c. Interest expense, under the generally accepted effective interest method, equals the book value of the debt (face value plus unamortized premium or minus unamortized discount) multiplied by the effective rate of the debt. Any premium or discount is amortized to zero over the life of the bond. Explain how both interest expense and the debt’s book value will differ from year-to-year for debt issued at a premium versus a discount.

d. Describe how to account for and classify any gain or loss from reacquisition of a long-term bond prior to its maturity.

e. Assess accounting for bonds in the analysis of financial statements.

Refer to the financial statements of Campbell Soup Company in

Refer to the of Campbell Soup Company in Appendix A.


a. Estimate the amount of depreciation expense reported on Campbell’s tax returns for each of the Years 11, 10, and 9. Use a tax rate of 34%.

b. Identify the amounts and sources in each of the Years 11, 10, and 9 for the following (note: combine federal, foreign, and state taxes).

(1) Earnings before income taxes.

(2) Expected income tax at 34%.

(3) Total income tax expense.

(4) Total income tax due.

(5) Total income tax due and not yet paid at end of Years 11, 10, and 9.

c. Why does the effective tax rate for Years 11, 10, and 9 differ from 34% of income before taxes? Answer with a reconciliation including explanations.

d. There is a small tax benefit derived from the divestiture and restructuring charges in Year 10. Can you estimate the cash outlays for these charges in Year 10?

You are the portfolio manager of a highyield bond portfolio

You are the manager of a highyield bond at Solomon Group.

You are concerned about the financial stability of Florida Gypsum Corporation (FGC), whose bonds represent one of the holdings in your at the middle of Year 6. The bonds you hold, 13.25% senior subordinated due in Year 16, were issued at par in Year 5, and are currently priced in your at 53. Your high-yield bond sales staff is not optimistic they can even develop a bid at that level. FGC is a large producer of gypsum products, accounting for approximately one-third of total gypsum sales. The company also manufactures ceiling tile, caulks, sealants, floor and wall adhesives, and other specialty building products.

In Year 5, FGC did a leveraged recapitalization of its balance sheet. This involved paying a large to common shareholders financed with several new subordinated debt financings, including the 13.25% that you hold. The company’s primary competitor, American Gypsum, is highly leveraged, following its acquisition by a large Canadian company. Due to a downturn in residential and commercial construction activity beginning in Year 4, demand for gypsum wallboard fell off through the middle of Year 6. However, capacity continues to expand at a rate of nearly 2% per year. As a result, capacity utilization has declined to 85% currently, from 87% in Year 4 and a peak of 95% in Years 1 and 2. The price of wallboard, which peaked in Year 2, has subsequently declined by more than 30%.

To help you in analyzing FGC’s prospects, you assemble various financial data that follow. The director of fixed income research at Solomon Group suggests that you look carefully at ratios of short-term liquidity and operating performance, specifically the quick ratio, accounts receivable turnover ratio, , and operating profit margin. You prepare the table below and schedule a meeting with the director to discuss what the firm should do with FGC.

Financial statement data for Florida Gypsum Corporation include the following:


a. The director of fixed income research subsequently argues that the four ratios computed do not reveal important changes in the financial condition of FGC. Discuss limitations of these ratios in assessing the liquidity and operating performance of a company like FGC.

b. Identify at least two better measures of short-term liquidity and operating performance for FGC. Calculate their values and discuss their trend over the period Year 4 through middle of Year 6. Explain why these measures better reflect FGC’s liquidity and operating performance.

c. Based on the analysis performed in (b) and on the background information provided, recommend and justify whether you should attempt to sell the FGC bonds, retain them, or buy more FGC bonds.

Refer to the financial statement data of ABEX Chemicals, Inc.,

Refer to the financial statement data of ABEX Chemicals, Inc., reproduced in Case 10–5.


a. Prepare a forecast of ABEX’s total operating income for Year 10. (Hint: Refer to forecast data for volume, price, and cost.)

b. Identify additional information necessary to prepare a forecast of earnings per share (EPS) for Year 10, and identify five primary sources where you can obtain this information (you should identify primary sources and not necessarily external sources for the information needed).

c. Forecast and explain incremental changes in ABEX’s earnings per share based on each of the following two independent scenarios for the petrochemical division only.

(1) Price of polyethylene in Year 10 is 8% higher than shown in the selected key statistics.

(2) Volume of production and sales of polyethylene is 8% higher than shown in the selected key statistics.

Ace Company’s net income for the year is $4 million

Ace Company’s net income for the year is $4 million and the number of common shares outstanding is 3 million (there is no change in shares outstanding during the year). Ace has options and warrants outstanding to purchase 1 million common shares at $15 per share.


a. If the average market value of the common share is $20, year-end price is $25, interest rate on borrowings is 6%, and the tax rate is 50%, then compute both basic and diluted EPS.

b. Do the same computations as in a assuming net income for the year is only $3 million, the average market value per common share is $18, and year-end price is $20 per share.

Select a company from a nonregulated industry for which you

Select a company from a nonregulated industry for which you can obtain complete for at least the most recent six years.

Based on these the company’s background, industry statistics, and other market and company information, prepare a financial statement analysis report covering the following points:

a. Executive summary of the company and its industry.

b. Detailed evaluation of:

(1) Short-term liquidity (current debt-paying ability).

(2) Cash forecasting and pro forma analysis.

(3) and solvency.

(4) Return on invested capital.

(5) (utilization).

(6) Profitability and equity analysis. Note: You are expected to use a variety of financial analysis tools in answering (b). Your analysis should yield inferences for each of these six areas.

c. Comment on the usefulness of the of this company for your analysis.

d. How did accounting principles used in the affect your analytical measures?

e. Prepare a forecast of the income statement, balance sheet, and statement of cash flows for a five-year horizon and a terminal year in Year 6.

f. Estimate the value of your company’s per share using the valuation analysis and procedures described in the Comprehensive Case.

Big-Deal Construction Company specializes in building dams. During Years 3,

Big-Deal Construction Company specializes in building dams. During Years 3, 4, and 5, three dams were completed. The first dam was started in Year 1 and completed in Year 3 at a profit before income taxes of $120,000. The second and third dams were started in Year 2. The second dam was completed in Year 4 at a profit before income taxes of $126,000, and the third dam was completed in Year 5 at a profit before income taxes of $150,000. The company uses percentage of-completion accounting for financial reporting and the completed-contract method of accounting for income tax purposes. The applicable income tax rate is 50% for each of the Years 1 through 5. Data relating to progress toward completion of work on each dam as reported by the company’s engineers are given here:


For each of the five years, Year 1 through Year 5, compute:

a. Financial reporting (book) income.

b. Taxable income.

c. Change in deferred income taxes.