Question #44
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 38
Status: Correct
Correct Answer: C
Question
Samuel Maskin, CFA is evaluating the financial statements of Northern Energy Inc. The following is an extract from Northern's cash flow statement for the past three years: 20x6 20x5 20x4 Net Income $1,023 $988 $744 Depreciation $187 $145 $128 Restructuring Charges $(108) $(104) $212 Accounts receivable $(172) $(145) $(33) Inventories $(418) $(202) $(180) Accounts Payable $38 $37 $33 OCF $550 $719 $904 The restructuring charges for Northern has most likely:
Answer Choices:
A. Increased reported earnings in 20x6 while reducing reported earnings in 20x4 and 20x5
B. Increased reported earnings for 20x4 while reducing reported earnings in 20x5 and 20x6
C. Reduced reported earnings in 20x4 while increasing reported earnings in 20x5 and 20x6
Explanation
Restructuring charges contribute positively to 20x4 cash flow indicating that it was a non-
cash charge against that year's income. In the following two years, there is a reversal of
that charge leading to an artificial increase in reported earnings for 20x5 and 20x6.