WorldCom, Inc., allegedly reported nearly $4 billion as fixed assets on its balance sheet, rather than as operating expense on its income statement. Of this amount, $3.06 billion should have been expensed in 2001, rather than debited as a fixed asset. As a result of this discovery, WorldCom lost credibility with investors, and its common stock lost nearly all of its value. WorldCom made public disclosures of its net income, as required, but also focused its earning announcements on EBITDA. The income statement for the year ended December 31, 2001, reported the following:
WorldCom, Inc.
Income Statement
For the Year Ended December 31, 2001
(in millions)
Revenues ............... $35,179
Operating expenses:
Line costs ............... $14,739
Selling, general, and administrative ..... 11,046
Depreciation and amortization ....... 5,880
Total ................. $31,665
Operating income ............ $ 3,514
Other income (expense):
Interest expense ............. (1,533)
Miscellaneous income ............ 447
Income before income taxes ........ $ 2,428
Provision for income taxes .......... 927
Net income ................ $ 1,501
1. Determine EBITDA, using the reported figures.
2. Determine EBITDA as it should have been reported in 2001 if costs were properly expensed, rather than debited as a fixed asset.
3. Assume that fixed assets are depreciated on the straight-line basis for five years. Under this assumption, what would be the correct net income (loss) before income taxes for 2001?