Question

The following information was taken from the income statement of AJAX Corporation for the year ended December 31, 2014.
AJAX is a holding company with subsidiaries providing research, development, manufacturing, and marketing of brand name household products.
($ in 000)
Amortization of intangible assets $ ................ ?
Cost of goods sold ....................... ?
Extraordinary gain on extinguishment of debt, net of taxes ...... 2,242
General and administrative expenses .............. 176,868
Gross profit ........................ 482,342
Net income ........................ 149,284
Income before extraordinary item ............... ?
Income from continuing operations ............... ?
Income from continuing operations before income taxes ...... 69,328
Income from discontinued operations, net of taxes ......... 97,808
Interest expense ....................... ?
Interest income ....................... 23,944
Net revenues ....................... ?
Operating income ..................... ?
Other income, net ..................... 41,660
Provision for income taxes .................. 20,094
Research and development .................. 97,230
Restructuring costs and asset write-downs ........... 24,444
Selling expenses ...................... 159,016
Gross profit as percent of sales ............... 37.81%
Total operating expenses .................. $464,904

Required:
1. Recast AJAX’s income statement and present it in good form. Fill in the missing data.
2. Consider the item called Restructuring costs and asset write-downs. What impact did this charge have on AJAX’s cash flows?
3. AJAX’s income statements over the last three years report research and development expenses averaging $51.3 million per year. AJAX incurred these expenses to enhance current products and to develop new products in the hope of generating higher future sales. GAAP requires that all such costs be expensed in the year incurred. Consider the following statement:
Research and development expenditures are really assets because they will benefit the future operations of the firm (that is, lead to higher sales).
If you agree, suggest an alternative way to account for research and development expenditures rather than expensing them in the year incurred. If you disagree, what are your reasons?
4. Assume that you are a financial analyst for AJAX. Your boss has asked you to project next year’s net earnings. What earnings number from the information provided here would you use as the basis for your projection? Why?



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  • CreatedSeptember 10, 2014
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