Question

A company provided the following select GAAP data and non-GAAP disclosures:

Select Income Statement (GAAP) Data
($ in millions)
	2019A
Revenue	732
Cost of goods sold	149
Gross profit	583

non-GAAP Disclosures
($ in millions)	2019A
GAAP Net income	(91)
Amortization of purchased intangible assets	6
Stock based compensation	51
Restructuring expenses	184
Losses on investments	14
Tax impact of non-GAAP items	(65)
non-GAAP Net income	99
Stock based compensation
($ in millions)	2019A
Cost of goods sold	16
Research & development	12
Other operating expenses	23
Stock based compensation	51
Amortization of purchased intangible assets
($ in millions)	2019A
Cost of goods sold	5
Other operating expenses	1
Amortization of purchased intangible assets	6

Assuming all restructuring expenses were allocated to “Other Operating Expenses,” what is 2019 non-GAAP gross profit margin?

• 82.5%

• 81.8%

• 81.1%

• 76.8%

Answer 1

GAAP items includes cost of goods sold related to Amortization of purchased intangible assets and stock based compensation, since Non GAAP net income is arrived at after adding back expenses related to GAAP items.

GAAP gross profit = Non GAAP gross profit + GAAP items gross Profit

So if we remove cost of goods sold related to GAAP items we will get Non GAAP gross profit.

Revenue = 732

Less: Adjusted Cost of goods sold = 128

(149-16-5)

Gross profit(NON GAAP) = 604

Gross profit % = 604/732 = 82.5%, Option A is correct