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Chapter: Chapter 19: Nonoperating Items, Provisions, and Reserves
Multiple Choice
1. Which of the following are typical nonoperating expenses?
I. Amortization expense.
II. Restructuring charges.
III. Litigation expenses.
IV. Purchased research and development (R&D).
a) I and II only.
b) I, II, and III only.
c) III and IV only.
d) I, II, III, and IV.
2. All of the following are related to the ongoing core business EXCEPT:
a) Royalty expense.
b) Restructuring charges.
c) Selling, general, and administrative (SG&A) expenses.
d) R&D expenses.
3. With respect to the treatment of goodwill in the analysis of a company and determining the
return on invested capital (ROIC), which of the following is most accurate?
a) Treat goodwill impairments as operating and subtract cumulative impairments from goodwill
on the balance sheet.
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b) Treat goodwill impairments as operating and add back cumulative impairments to goodwill
on the balance sheet.
c) Treat goodwill impairments as nonoperating and add back cumulative impairments to
goodwill on the balance sheet.
d) Treat goodwill impairments as nonoperating and subtract cumulative impairments from
goodwill on the balance sheet.
4. Given the following entries, compute ROIC based on beginning–of-the-year investments.
Assume that all invested capital entries are beginning–of-the-year entries and all income
statement entries are for the entire year.
Reported EBITA = 1,000
Reserve for plant decommissioning = 2,000
Interest associated with plant decommissioning = 200
Reserve for restructuring = 600
Equity = 4,000
a) 12.12 percent.
b) 14.81 percent.
c) 18.18 percent.
d) 22.22 percent.
5. Which of the following is most accurate concerning plant decommissioning costs and
unfunded retirement plans?
a) They are both long-term operating provisions and should be treated as debt equivalents.
b) They are both short-term operating provisions and should be treated as short-term liabilities.
c) They are both long-term operating provisions. Plant decommissioning costs should be
treated as a debt equivalent, and unfunded retirement plans should be treated as an equity
equivalent.
d) Plant decommissioning costs are not an operating provision and should not be included in
value estimation. Unfunded retirement plans are long-term operating provisions and should be
treated as an asset.
6. Product returns and warranties are nonoperating provisions that do not affect NOPLAT.
7. If litigation charges recur frequently and grow with revenue, the analyst should treat the
charges as operating.
8. The size of a nonoperating expense or one-time charge mentioned in a management
discussion and analysis (MD&A) note might determine if it should be included in the adjustment
to NOPLAT.
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9. Provisions for the sole purpose of income smoothing should be treated as an equity
equivalent.
10. List the three recommended steps in assessing the impact of nonoperating expenses and
incorporating their information in cash flow forecasts.