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Livent, Inc., was a publicly traded theatrical production company that staged a number of smash hits such as Tony award winning productions of Showboat and Fosse. Livent capitalized preproduction costs including expenses for pre opening advertising, publicity and promotion, set construction, props, costumes, and salaries and fees paid to the cast and crew musicians during rehearsals. The company then amortized these capitalized costs over the expected life of the theatrical production based on anticipated revenues.
I. State the effect of Livent’s accounting for preproduction costs on its reported earnings per share.
we will encounter the popular concept of EBITDA: earnings before interest, taxes, depreciation, and amortization (interest, taxes, depreciation, and amortization are added back to earnings). Some analysts use ratios such as EBITDAIinterest expense and debt1EBITDA to assess one aspect of a company’s financial strength, debt paying ability.
2. If an analyst calculated EBITDAIinterest expense and debt1EBITDA based on Livent’s accounting for preproduction costs without adjustment, how might the analyst be misled in assessing Livent’s financial strength?