Question: As PhilDrakeCo's fiscal year-end was nearing, the CFO presented the CEO expected financial statement results for the year. The after-tax operating income (OI) was to be $12.6 million resulting in a return on beginning-of-period net operating assets (NOA) of 14.0 percent. "This won't do!," declared the CEO. "The Street is expecting a 15.0 percent RNOA," the CEO continued and sent the CFO back to her office to find any "accounting tricks" to meet the target.
A. How much after-tax operating income does the CFO need to add to meet the Street's expectations?
B. What is the likely effect of the earnings management on NOA in the current year and its implication for RNOA the following year?
C. Explain how, in general, a manipulation of current operating income has an "accounting effect," but does not have a "valuation effect."