Question

You are the Controller of ABC Manufacturing Corp, a publicly traded furniture manufacturing company, based on Long Island. Business has been going well for ABC. Over the last four quarters the EPS have been 50, 54, 59, and 60 cents per share. It is nearing the end of the quarter and most of the analysts that are following your stock are projecting an EPS for the current quarter of 69 cents per share, which looks right in line with what you are projecting for the quarter.

However, just as you are going over the quarter to date figures, four new items are brought to your attention:

1. A wholesale account that has been a long term and important customer (up to 10% of sales) to ABC has just declared Chapter 11 bankruptcy.  

2. A piece of land that the company has held as an investment for years has just been sold to a real estate development company and a profit of 5 cents net of tax has been realized.

In each case, what additional information might you seek? Depending on what you find out, what would US GAAP require you to report or disclose in your quarterly 10Q? How would the above events be reflected in your quarterly income statement? What EPS concerns would you expect to hear from the CFO and President? What alternatives would be available to you to appropriately and ethically adjust earnings?

Answer 1

The projected EPS for the current quarter of 69 cents per share has to take into account the following about the new items that hav ecropped up :

US GAAP requires uncollectibe receivables to be written off as bad debts in the period in which it becomes certain.Accordingly, this much amount of sales might not be realised, after going through the Income statement for the quarter. This needs to be disclosed ,to be read along with the 10Q's results.

Similarly, profit on sale of property , a notional income , also needs to be disclosed, so that the sale is also informed simultaneously.

The former one decreases income & the gain increases income ,for the quarter.

So, EPS ,projected as above,will decrease, as a net result.

There seems to be no other alternative available than to appropriately divulge the new items & their effect on the quarter's previous net income already projected & consequently on the Earnings Per Share(EPS)