Question

A company reports the following GAAP income statement: Income Statement (GAAP) ($ in millions) 2019A

Revenue 654
Operating expenses 254
Operating profit 400
Interest expense 14
Other expenses 3
Pretax profit 383
Taxes 77
Net income 306

In addition to the GAAP income statement, the company provided a 2019 non-GAAP disclosure identifying:

$12 million in stock-based compensation expense
$7 million in restructuring expenses
$5 million gain on sale

Assuming the company’s effective tax rate applies to non-GAAP items, estimate 2019 non-GAAP net income:

a. $295 million
b. $317 million
c. $323 million
d. $325 million

Answer 1

a. $295 million

Step-by-step explanation:

Effective tax rate = GAAP tax / GAAP Pretax profift = 77 / 383 = 0.2010, or 20.10%.

Therefore, 2019 non-GAAP net income can be estimated as follows:

Details $ in millions

GAAP Pretax Profit 383

Stock-based compensation expense (12)

Restructuring expenses (7)

Gain on sale 5

Non GAAP Pretax Profit 369

Taxes (20.10% * 369) (74)

Non-GAAP net income 295