EBITA stand for Earnings before Interest, Taxes, Depreciation and Amortization which is a fairly accurate measure of a company’s operating cash flow on data from the company’s income statement. It is calculated by deducting the operating expenses excluding depreciation and amortization from the Gross Profit.
This technique is mostly used by the companies who have large amounts of fixed assets which are subject to high depreciation rate which cause an huge amount of depreciation expense for example manufacturing companies or in the case where a company has a large amount of acquired intangible assets and is thus subject to large amortization expense for example a company who has purchased a brand of the company or acquired an Intangible asset recently.
EBITDA is a useful measure to compare the company within and across the industry because distortniaray and finance accounting has no impact on EBITDA.
It is also very much helpful for the company’s lender because EBITDA is essentially the income that company has free for making interest payment to lenders.
Generally, EBITDA is very useful only for assessing larger companies which have important assets, and/or for companies with a major quantity of debt financing. It is not a useful measure for evaluating low capital organization with have not taken too much loans or acquired capital asset. Part-B The Worldcom has capitalized an operating expense of amounting to Rs.
3. 8 Billion in the fixed asset due to which the company net income enhanced significantly and it’s has strongly effect EBITDA as depreciation cost is excluded from it.
As a result the share holder of other EBITDA companies has sell their share due to fear that these companies can also use same kind of misappropriation as used by the Worldcom and this has strongly effect the repute of Worldcom and EBITDA method. Part-C What is wrong with performance matrices?
The performance matrices such as EBITDA or “cash earning” or “pro forma earnings” or “core earnings” or “operating earnings” or “recurring earnings” — have criticized in recent years so much, as companies mostly use it to posting better result then they are actually under slow economic progress. All along, critics have lambasted these alternatives to net income, saying they give companies too much flexibility in deciding how to account for expenses. Still, many people argue that EBITDA is a valuable performance matric when used alongside other measures.
Larry Haverty, a managing director with State Street Research & Management, views EBITDA as an appropriate measure for the media industry particularly because media companies have assets like broadcasting licenses or film libraries that historically have risen in value. As a result, depreciation charges are “very artificial,” and use of earnings per share as a measure doesn’t give a true picture of a company’s cash position. Chapter 13 – Research Question Part-A Condition for anticipated claims:
The following are the conditions for anticipated claims: 1. There must be a reason able estimate of anticipated claims 2. The event to which it’s relate is happened in the past 3. The claim is likely to paid in future Yes from the information given it is appear that Georgia Pacific meets those conditions and it have to account for these anticipated claims because the share price is declined for the recent quarter and it is probable that a suit is filed in the Security and Exchange Commission.
Part-B
Journal entry of asbestos claim: The following journal entry will be passed of this claim (in millions) Asbestos claim …………………… (Dr. ) $ 221 Provision for asbestos claim……………… (Cr. ) $ 221 The asbestos claim is expense out during the current reporting period and provision for asbestos claim is recognized in Balance Sheet under the Current Liability. Part-C Estimation used by Georgia Pacific or calculating asbestos claim:
The company has estimated the asbestos claims of amounting $ 221 million on the reduction of share price since early December i-e 37 percent. The basis used by Georgia Pacific for calculating asbestos claims are not seems to be reasonable because it has calculated the claims on the basis of share market price and neglecting the future growth of the company as shown in the last quarter the sales of the company has been rose by five percent and it is expected that the asbestos liability will declined in the next decade.
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