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Valuation: Measuring and Managing the Value of Companies, Fifth Edition
Chapter 16 Solutions
Markets Value Substance, Not Form
1. Companies attempt to manage earnings by timing the recognition of revenues and costs
or by using gimmicks such as selling assets or introducing customer incentives.
2. Capitalizing a cost means lowering current expenses and placing a depreciable asset on
the balance sheet. Over time, the depreciation of the asset will cause the expenses in
3. Although investors place more importance on a company’s economic fundamentals than
on reported earnings, sometimes short-term earnings are the only data investors have on
4. Companies whose earnings reflect their fundamentals and cash flows and that
consistently meet earnings forecasts will be more highly valued than those that do not.
5. Investors care about goodwill impairment only if the adjustment reflects
lower-than-expected benefits from the acquisition that have not already been reflected in
6. Changes from last-in first-out (LIFO) to first-in first-out (FIFO) inventory can change
7. The potential benefits from cross-listing are an increase in analyst coverage, a broader
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8. Capitalizing any cost delays its recognition as an expense. For growing firms, capitalizing
current costs will usually increase income in the current year because the increase in
expenses from the past capitalized costs, now being recognized, will be less than the
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