Ruby Tuesday, Inc. owns and operates Ruby Tuesday casual dining restaurants. The firm also franchises the Ruby Tuesday concept in selected domestic and international markets. As of the end of Year 12, it owned and operated almost 400 restaurants, and had more than 200 franchised restaurants. Exhibit 6.14 presents an income statement for Ruby Tuesday, Inc. for Year 12, Year 11, and Year 10. The notes to the financial statements reveal the following additional information:
1. Peripheral losses. In Years 12 and 10, Ruby Tuesday recorded pretax losses on restaurants it sold. For Year 10, the firm recognized the sale of a set of restaurants- American Cafe, L8cN Seafood, and Tia's Tex-Mex restaurants-to Specialty Restaurant Group and recorded a pretax and after-tax loss of $10.0 million. Ruby Tuesday received a note payable of $28.9 million from the Specialty Restaurant Group as partial payment for the restaurants. In Year 12, Ruby Tuesday recorded an additional loss on the sale by writing off the note due to the firm from the Specialty Restaurant Group. Ruby Tuesday indicated that the write-off generated a $11.4 million tax benefit.
2. Accounting change. Ruby Tuesday adopted Statement No. 133 in Year 12. Statement No. 133 addresses accounting for derivative instruments. The firm reports the cumulative effect of the accounting change net of tax affects. Note that the firm uses the cumulative-effect method for reporting the change because Statement No. 154 was not effective for Year 12.

Required
a. Discuss the appropriate treatment of items 1 and 2 when using earnings to forecast the future profitability of Ruby Tuesday.
b. Indicate the adjustments to the income statement to eliminate the items in part a.
c. Ruby Tuesday's statement of cash flows shows an add back to net income for the losses on the restaurant sales for both Year 12 ($28.9 million) and Year 10 ($10.0 million). What is the interpretation of this add back?

EXHIBIT 6.14 Ruby Tuesday, Inc. Income Statement (amounts in millions) Problem 6.12) Year 12 Year Year 10 Restaurant Sales and Operating Revenue...................$819 Franchise Revenues Total Revenues 770 $783 14128 $782 $ 793 S 833 .(268 (248 (251) Cost of Merchandise Other Restaurant Operating Costs Depreciation and Amortization (221) (213) (214) (159) (42) (155) (148) (34) (10) (53) Loss on Sale of Various Restaurants (45) (50) Interest Income (Expense) Income before Income Taxes and Cumulative $ 87 93 63 (30)(33) (26) 60 $ 37 n for Income Taxes Income before Cumulative Effect of Change in Accounting Principle S 57 Cumulative Effect of Change in Accounting Principle................() S 60 $ 37