Quattro Technologies, a hydraulic manufacturer in the aeronautics industry, has reported steadily increasing net income over the past few years. The company reported net income of $120 million in 2019 and $140 million in 2020. The stock is receiving increasing analyst attention because many investors expect the steady growth in net income to continue well into the future.One of the factors increasing sales is the superior warranty Quattro offers. Based on experience, warranty expense in 2021 should be around $40 million. However, in a recent executive meeting it was suggested that the CFO report a larger, more conservative, estimate of warranty expense of $50 million this year.Required:1. Can Quattro use warranty expense to manage its reported amount of net income?2. Assume net income before warranty expense is $210 million in 2021 and $210 million in 2022, and total warranty expense over the two years is $80 million. Calculate net income after warranty expense based on the suggestion in the executive meeting to report $50 million in warranty expense in 2021. Calculate net income after warranty expense in 2022.3. Does reporting warranty expense of $50 million in 2021 and $30 million in 2022 produce a steadier growth in net income than does reporting $40 million in each year?
Quattro Technologies, a hydraulic manufacturer in the aeronautics industry, has reported steadily increasing net income over the past few years. The company reported net income of $120 million in 2019 and $140 million in 2020. The stock is receiving increasing analyst attention because many investors expect the steady growth in net income to continue well into the future.
One of the factors increasing sales is the superior warranty Quattro offers. Based on experience, warranty expense in 2021 should be around $40 million. However, in a recent executive meeting it was suggested that the CFO report a larger, more conservative, estimate of warranty expense of $50 million this year.
Required:
1. Can Quattro use warranty expense to manage its reported amount of net income?
2. Assume net income before warranty expense is $210 million in 2021 and $210 million in 2022, and total warranty expense over the two years is $80 million. Calculate net income after warranty expense based on the suggestion in the executive meeting to report $50 million in warranty expense in 2021. Calculate net income after warranty expense in 2022.
3. Does reporting warranty expense of $50 million in 2021 and $30 million in 2022 produce a steadier growth in net income than does reporting $40 million in each year?
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