CFA Level I · CFA Level I Exam · Analyzing Income Statements
Quillon Ltd reports the following for the year (currency units in thousands): revenue 900, operating expenses 640, a gain on sale of a plant of 50 (included in other income, an unusual item), and tax at 30% on all pre-tax items. The analyst wants earnings from ongoing operations after tax, excluding the gain. Ongoing after-tax earnings are closest to:
Ongoing after-tax earnings are about 182. Revenue of 900 less operating expenses of 640 gives 260 pre-tax, excluding the unusual plant gain. Applying a 30% tax rate leaves 260 times 0.70, which equals 182. Using 260 ignores tax.
- A182Correct
- B260
- C295
Explanation
Ongoing pre-tax = 900 - 640 = 260. After tax at 30% = 260 x 0.70 = 182. Option 295 is reported net income including the gain: (260+50) x 0.7 = 217 is not it; 295 results from adding 50 after tax mistakenly to 260 less... in any case it is wrong. Option 260 ignores tax.
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