Several years ago, PepsiCo’s earnings either rose or fell, depending on the source of the information. Standard & Poor’s reported that PepsiCo experienced a 25 percent earnings gain, while Value Line, another investor service, reported that PepsiCo experienced a 7 percent loss. The discrepancy involved a “normal but nonrecurring charge” taken by PepsiCo to write down foreign bottling assets. Standard & Poor’s ignored the charge in its earnings calculation, while Value Line included the charge.
a. Provide reasonable arguments that Standard & Poor’s and Value Line could have used to support the decision either to ignore or include the charge in the calculation of PepsiCo’s income.
b. Briefly describe the categories comprising a complete income statement and explain how such categories are usually disclosed.
c. Forbes once reported that “most financial analysts [are not concerned about] the geographic location of such items on the income statement.” It is only important that they be disclosed. Explain why financial analysts might take such a position. At the same time, provide an argument suggesting that the specific location of an item on the income statement is important in an economic sense. State your argument in terms of earnings persistence and how income numbers are used in contracts.
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