You are a Financial Analyst for a large corporation. The Chief Financial Officer
ID: 2790043 • Letter: Y
Question
You are a Financial Analyst for a large corporation. The Chief Financial Officer
(CFO) of the company has just reviewed preliminary 3rd quarter earnings with the
company CEO. The meeting did not go well. The company publicly announced a
target of 5% growth in earnings (or net income) for this year over the previous
year. Earnings growth will be closer to 3% based on quarterly income statements
thus far. The CEO has directed the CFO to make recommendations by the end of
the week as to how the company could quickly boost reported earnings (or net
income) in the 4th quarter and potentially meet the 5% earnings growth target.
The CFO has called a meeting of all financial analysts on her staff. She has given
all of you the following:
recommend two actions that can be
implemented quickly and fully explain how each action would potentially increase
reported net income.
Explanation / Answer
Since the time is limited to boost reported earnings a fundamental change on the lines of improving revenues or decreasing costs will not work under this scenario. To quickly improve the earnings some of the measures could be
a) Capitalize some of the costs of they were expensed initially.Capitalizing will have a smoothening effect and will improve the earnings
b) The firm can estimate longer lives for assets and larger estimates of salvage vale to decrease the depreciation thereby improving the earnings
c) If accelerated methid of depreciation is used, change it to straight line method to be more conservative in capitalizing thereby improving the earnings
d) If there are any impariments or writedown delay these to next year to improve the earnings prospects this year
e) Bad debt reserves can be written back and shortened to improve the receivables component and increase earning in the coming year.
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