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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,Equity Analysis and Valuation,12,CHAPTER,McGraw-Hill/Irwin,2004 The McGraw-Hill Companies,Inc.,All Rights Reserved.,Equity Analysis and Valuation1,1,Earnings Persistence,Recasting and Adjusting,Earnings persistence is a key to effective equity analysis and valuation,Analyzing earnings persistence is a main analysis objective,Attributes of earnings persistence include:,Stability,Predictability,Variability,Trend,Earnings management,Accounting methods,Earnings PersistenceRecasting,2,Earnings Persistence,Recasting and Adjusting,Two common methods to help assess earnings persistence:,Recasting of income statement,Adjusting of income statement,Earnings PersistenceRecasting,3,Earnings Persistence,Recasting and Adjusting,Information for Recasting and Adjusting,Income statement,including its subdivisions:,Income from continuing operations,Income from discontinued operations,Extraordinary gains and losses,Cumulative effect of changes in accounting principles,Other financial statements and notes,Management commentary in financial statements,Managements Discussion and Analysis,Other:productmix changes,technological innovations,work stoppages,and raw material constraints,Earnings PersistenceRecasting,4,Earnings Persistence,Recasting and Adjusting,Objectives of Recasting,1.Recast earnings and earnings components so that stable,normal and continuing elements comprising earnings are distinguished and separately analyzed from random,erratic,unusual and nonrecurring elements,2.Recast elements included in current earnings that should more properly be included in the operating results of one or more prior periods,Recasting and adjusting earnings also aids in determining earning power,Earnings PersistenceRecasting,5,General Recasting Procedures,Income statements of several years(typically at least five)are recast,Recast earnings components to yield meaningful classifications and a relevant format for analysis,Components can be rearranged,subdivided,and tax effected,Total recasted components must reconcile to reported net income,Earnings Persistence,Recasting and Adjusting,General Recasting ProceduresEa,6,Specific Recasting Procedures,Discretionary expenses are segregated,Distinct components are segregated(such as equity in income of unconsolidated subsidiaries)and often reported net of tax,When components of continuing income are separately reclassified,their pre-tax amounts along with their tax effectsmust be removed,Income tax disclosures enable one to separate factors that either reduce or increase taxes such as:,Deductionstax credits,capital gains rates,tax-free income,lower foreign tax rates,Additionsadditional foreign taxes,non-tax-deductible expenses,and state and local taxes(net of federal tax benefit),Earnings Persistence,Recasting and Adjusting,Specific Recasting ProceduresE,7,Recasting and Adjusting-Illustration,Earning Persistence,Campbell Soup Company,Recast Income Statements($mil.),ItemYear 11Year 10Year 9Year 8Year 7Year 6,13Net sales$6,204.1$6,205.8$5,672.1$4,868.9$4,490.4$4,286.8,19Interest income,26.0,17.6,38.3,33.2,29.5,27.4,Total revenue$6,230.1$6,223.4$5,710.4$4,902.1$4,519.9$4,314.2,Costs and expenses:,Cost of products sold(see Note 1 below)$3,727.1$3,893.5$3,651.8$3,077.8$2,897.8$2,820.5,Marketing and selling expenses(see Note 2 below)760.8760.1605.9514.2422.7363.0,145 Advertising(see Note 2 below)195.4220.4212.9219.1203.5181.4,144 Repairs and maintenance(see Note 1 below)173.9180.6173.9155.6148.8144.0,16 Administrative expenses306.7290.7252.1232.6213.9195.9,17 Research and development expenses56.353.747.746.944.842.2,102 Stock price,related incentive programs(see Note 3 below),15.4(0.1)17.4(2.7)8.5,20 Foreign exchange adjustment0.83.319.316.64.80.7,104 Other,net(see Note 3 below)(3.3)(2.0)(1.4)(4.7)(0.4)(9.0),162A Depreciation(see Note 1 below)194.5184.1175.9162.0139.0120.8,103 Amortization of intangible and other assets(see Note 3 below),14.116.816.48.95.66.0,18 Interest expense,116.2,111.6,94.1,53.9,51.7,56.0,Total costs and expenses$,5,557.9,$,5,712.7,$,5,266.0,$,4,480.2,$,4,132.2,$,3,930.0,23Earnings before equity in earnings of affiliates&min.interests,$672.2$510.7$444.4$421.9$387.7$384.2,24Equity in earnings of affiliates2.413.510.46.315.14.3,25Minority interests,(7.2),(5.7),(5.3),(6.3),(4.7),(3.9),26Income before taxes$667.4$518.5$449.5$421.9$398.1$384.6,Income taxes at statutory rate*,(226.9),(176.3),(152.8),(143.5),(179.1),(176.9),Income from continuing operations$440.5$342.2$296.7$278.4$219.0$207.7,135State taxes(net of federal tax benefit)(20.0)(6.6)(3.8)(11.8)(8.6)(8.0),Investment tax credit4.411.6,137Nondeductible amortization of intangibles(4.0)(1.6)(1.2)(2.6)(1.4),138Foreign earnings not taxed or taxed at other than statutory rate,2.0(2.2)(0.2)3.211.115.2,139Other:Tax effects(17.0)(2.2)(0.1)(3.7)7.5(4.7),Alaska Native Corporation transaction4.5,22Divestitures,restructuring
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