Livent, Inc. was a publicly traded theatrical production company that staged a number of smash hits such as Tony–award winning productions of Showboat and Fosse. Livent capitalized preproduction costs including expenses for pre-opening advertising, publicity and promotion, set construction, props, costumes, and salaries and fees paid to the cast, crew, and musicians during rehearsals. The company then amortized these capitalized costs over the expected life of the theatrical production based on anticipated revenues.⁶

i. State the effect of Livent’s accounting for preproduction costs on its reported earnings per share.

ii. State the effect of Livent’s accounting for preproduction costs on its balance sheet.

iii. If an analyst calculated EBITDA/interest expense and debt/EBITDA based on Livent’s accounting for preproduction costs without adjustment, how might the analyst be misled in assessing Livent’s financial strength? (Recall that EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. Ratios such as EBITDA/interest expense and debt/EBITDA indicate one aspect of a company’s financial strength, debt-paying ability.)