The president of Vancouver Viacom made the following comments to shareholders: R

Question

The president of Vancouver Viacom made the following comments to shareholders:

Regarding management attitudes, Vancouver Viacom has resisted joining an increasing number of companies who along with earnings announcements make extraordinary or nonrecurring loss announcements. Many of these cases read like regular operating problems. When we close plants, we charge earnings for the costs involved or reserved as we approach the event. These costs, in my judgment, are usually a normal operating expense and something that good management should expect or anticipate. That, of course, raises the question of what earnings figure should be used in assessing a priceearnings ratio and the quality of earnings.

Required:
a. Discuss your reactions to these comments.
b. What factors determine whether a gain or loss is extraordinary?
c. Explain whether you would classify the following items as extraordinary and why.
(1) Loss suffered by foreign subsidiaries due to a change in the foreign exchange rate.
(2) Write-down of inventory from cost to market.
(3) Loss attributable to an improved product developed by a competitor.
(4) Decrease in net income from higher tax rates.
(5) Increase in income from liquidation of low-cost LIFO inventories due to a strike.
(6) Expenses incurred in relocating plant facilities.
(7) Expenses incurred in liquidating unprofitable product lines.
(8) Research and development costs written off from a product failure (non-marketed).
(9) Software costs written off because demand for a product was weaker than expected.
(10) Financial distress of a major customer yielding a bad debts provision.
(11) Loss on sale of rental cars by a car rental company.
(12) Gains on sales of fixed assets.
(13) Rents received from employees who occupy company-owned houses.
(14) Uninsured casualty losses.
(15) Expropriation by a foreign government of an entire division of the company. (16) Seizure or destruction of property from an act of war.

Explanation / Answer

(a). PE Ratio: Since the PE Ratio measaures how much investors rae willing to pay per dollar of current earnings, higher PE's are often taken to mean that the firm has significant prospects for future growth. Of course, if a firm had no or almost no earnings, its PE would be quite large; so, as always, care is needed in interpreting this ratio as well as earnings figure. Since the PE Ratio measaures how much investors rae willing to pay per dollar of current earnings, higher PE's are often taken to mean that the firm has significant prospects for future growth. Of course, if a firm had no or almost no earnings, its PE would be quite large; so, as always, care is needed in interpreting this ratio as well as earnings figure. (b). Factors determining extrordinary gain or loss: Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurence. The following are the factors that determines the extraordinary gains and losses. 1. Unusual nature: The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to the typical activities of the company operations.   2. Infrequency of Occurence: The underlying event or transaction should be of a type that the company does not reasonably expect to recur in the forseeable future, takinfg into account the environment in which the company operates. The underlying event or transaction should be of a type that the company does not reasonably expect to recur in the forseeable future, takinfg into account the environment in which the company operates. (c). Identifying the extraordinary nature of transactions: (1) Loss suffered by foreign subsidiaries due to a change in the foreign exchange rate Answer: No, its not an extraordinary item. Justification:Gain or loss due to exchange is an ordinary item. (2) Write-down of inventory from cost to market. Answer: No, its not an extraordinary item. Justification: Write-down of inventory is an ordinay item (3) Loss attributable to an improved product developed by a competitor Answer: No, its not an extraordinary item. Justification: Losses due to major competetors is an ordinary item. (4) Decrease in net income from higher tax rates Answer: No, its not an extraordinary item. Justification: Gain or loss due to major revaluation or devaluation is an ordinary item. (5) Increase in income from liquidation of low-cost LIFO inventories due to a strike.
Answer: No, its not an extraordinary item. (6) Expenses incurred in relocating plant facilities Answer: No, its not an extraordinary item. (7) Expenses incurred in liquidating unprofitable product lines Answer: No, its not an extraordinary item. (8) Research and development costs written off from a product failure (non-marketed).
Answer: No, its not an extraordinary item. Justification: Write-down of research and development costs are ordinay. (9) Software costs written off because demand for a product was weaker than expected Answer: No, its not an extraordinary item. Justification: Write-down of research and development costs are ordinay. (10) Financial distress of a major customer yielding a bad debts provision Answer: No, its not an extraordinary item. (11) Loss on sale of rental cars by a car rental company Answer: No, its not an extraordinary item. Justification: Loss or gain from sale of property, plant etc are ordinary. (12) Gains on sales of fixed assets.
Answer: No, its not an extraordinary item. Justification: Loss or gain from sale of property, plant etc are ordinary. (13) Rents received from employees who occupy company-owned houses Answer: No, its not an extraordinary item (14) Uninsured casualty losses Answer: Yes, its an extraordinary item Justification: Loss or gain from casualties is an extraordinary. (15) Expropriation by a foreign government of an entire division of the company Answer: Yes, its an extraordinary item Justification: Loss or gain from expropriation is an extraordinary. (16) Seizure or destruction of property from an act of war. Answer: Yes, its an extraordinary item (1) Loss suffered by foreign subsidiaries due to a change in the foreign exchange rate Answer: No, its not an extraordinary item. Justification:Gain or loss due to exchange is an ordinary item. (2) Write-down of inventory from cost to market. Answer: No, its not an extraordinary item. Justification: Write-down of inventory is an ordinay item (3) Loss attributable to an improved product developed by a competitor Answer: No, its not an extraordinary item. Justification: Losses due to major competetors is an ordinary item. (4) Decrease in net income from higher tax rates Answer: No, its not an extraordinary item. Justification: Gain or loss due to major revaluation or devaluation is an ordinary item. (5) Increase in income from liquidation of low-cost LIFO inventories due to a strike.
Answer: No, its not an extraordinary item. (6) Expenses incurred in relocating plant facilities Answer: No, its not an extraordinary item. (7) Expenses incurred in liquidating unprofitable product lines Answer: No, its not an extraordinary item. (8) Research and development costs written off from a product failure (non-marketed).
Answer: No, its not an extraordinary item. Justification: Write-down of research and development costs are ordinay. (9) Software costs written off because demand for a product was weaker than expected Answer: No, its not an extraordinary item. Justification: Write-down of research and development costs are ordinay. Justification: Write-down of research and development costs are ordinay. (10) Financial distress of a major customer yielding a bad debts provision Answer: No, its not an extraordinary item. (11) Loss on sale of rental cars by a car rental company Answer: No, its not an extraordinary item. Justification: Loss or gain from sale of property, plant etc are ordinary. (12) Gains on sales of fixed assets.
Answer: No, its not an extraordinary item. Justification: Loss or gain from sale of property, plant etc are ordinary. Answer: No, its not an extraordinary item. Justification: Loss or gain from sale of property, plant etc are ordinary. (13) Rents received from employees who occupy company-owned houses Answer: No, its not an extraordinary item (14) Uninsured casualty losses Answer: Yes, its an extraordinary item Justification: Loss or gain from casualties is an extraordinary. (15) Expropriation by a foreign government of an entire division of the company Answer: Yes, its an extraordinary item Justification: Loss or gain from expropriation is an extraordinary. Answer: Yes, its an extraordinary item Justification: Loss or gain from casualties is an extraordinary. (15) Expropriation by a foreign government of an entire division of the company Answer: Yes, its an extraordinary item Justification: Loss or gain from expropriation is an extraordinary. Answer: Yes, its an extraordinary item Justification: Loss or gain from expropriation is an extraordinary. (16) Seizure or destruction of property from an act of war. Answer: Yes, its an extraordinary item Answer: Yes, its an extraordinary item

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.