Question

PART A

Including non-GAAP metrics in a company’s annual report is acceptable and may provide useful information for decision makers.

True or False

PART B

Manero Company included the following information in its annual report:

	20X3				20X2				20X1
Sales	$	178,400			$	162,500			$	155,500
Cost of goods sold		115,000				102,500				100,000
Operating expenses		50,000				50,000				45,000
Operating income		13,400				10,000				10,500

In comparison to year 20X2, the increase in operating income of 20X3 was primarily caused by the effect of margin increase of (ignore taxes):

Multiple Choice

• $3,400.

• $1,194.

• $2,422.

• $978.

Answer 1

PART A: Answer -TRUE

The Non-GAAP metrics in a company’s annual report is acceptable and it is useful for decision makers to take a decision, especially for investors.

The financial reporting of earnings as per GAAP uses accrual accouting, revenuew recognition principle etc… and those companies may also supplement financial reporting as per Non-GAAP. The non GAAP earnings are not legally regulated reporting by Securities Exchange Commission.

For example as per GAAP financial reporting, the companies show the earnings after depreciation. But in Non-GAAP financial reporting, they show their earning before charging depreciation. Being depreciation a non-cash expense, the earnings before depreciation will be useful for the investors.

Thus the use of GAAP and non- GAAP reporting are useful for investors. But there may be a chance of providing false information. The regulation G of SEC prohibits the misleading information provided as per both GAAP and Non-GAAP reporting.

PART B: Answer - $3,400

The effect of margin increase for Manero Company from 2012 to 2013 can be calculated as follows;

	2013	2012	2011
Sales	$       178,400	$       162,500	$       155,500
Cost of Goods Sold	$     (115,000)	$     (102,500)	$     (100,000)
Gross Profit	$         63,400	$         60,000	$         55,500
Operating income	$         13,400	$         10,000	$         10,500
Operating Expense	$       (50,000)	$       (50,000)	$       (45,000)
Net Profit	$         26,800	$         20,000	$         21,000
Margin increse as per operating income	$           3,400
Margin increse as per Gross Profit	$           3,400

Here, we can see the gross profit for 2012 is $60,000 and for 2013 is $ 63,400, shows an increase in grossprofit margin of $3,400,also we can see that the opearing income for 2012 is $ 10,000 and 2013 is $ 13,400. Thus there is also an increse of $3,400 in the margin. Hence we can say that the increase in operating income income of 2013 is primarly due to margin increase of $ 3,400.