General Motors once posted net income of $552 million, compared with a loss of $112.9 million a year earlier. Over $200 million of the profit was due to an accounting adjustment in its North American operations because its expected taxes turned out to be lower than it had anticipated in earlier periods. David Healy, an analyst with S.G. Warburg & Co., noted that “Cynice would say that since they couldn’t do it in the auto department, they did it in the accounting department.”
REQUIRED:
a. Explain what Mr. Healy means.
b. Explain how a change in expected tax rates can lead to a positive effect on reported earnings.
c. Do you believe that the $200 million gain represents an increase in the overall wealth of GM?