Practice Problems (Worked Solutions): Three Earnings Scenarios

How to use these problems

Each scenario supplies enough information to calculate an EBITDA-style result, but the path differs. One starts with operating profit; another separates depreciation from amortization; the final problem begins with a stated baseline and asks whether a proposed adjustment deserves inclusion. The figures are illustrative, not representations of actual companies.

Keep two questions separate as you work. First: what does the stated formula produce? Second: is the resulting measure a fair and consistently presented view of performance? A calculator answers the first. The second depends on accounting detail, supporting documents, and a defensible policy for adjustments.

Unless a problem says otherwise, figures are in U.S. dollars, and “EBITDA” means earnings before interest, taxes, depreciation, and amortization. For the first two cases, calculate it from operating profit by adding depreciation and amortization. That method avoids reconstructing the figure from net income and guessing at tax or financing items that have not been supplied.

Scenario 1: A clean bridge from operating profit

Northline Components reports annual operating profit of $184,000. Its income statement and supporting schedule show depreciation expense of $26,000 and amortization expense of $8,000. There are no other adjustments in the question.

Work it through

EBITDA = operating profit + depreciation + amortization

EBITDA = $184,000 + $26,000 + $8,000

EBITDA = $218,000

The total add-back is $34,000, not $26,000. Depreciation and amortization are distinct expense categories, even though both are added back in this calculation. Depreciation commonly allocates the cost of tangible assets over their useful lives; amortization commonly allocates the cost of certain intangible assets. The labels should come from the company’s accounts or schedules, not from an estimate based on what seems likely.

There is no special adjustment for the fact that these expenses do not necessarily represent cash paid in the current period. EBITDA’s arithmetic adds the expenses back; it does not claim that the company avoided the cash cost of acquiring or maintaining the assets. Northline may still need to replace equipment, and its intangible assets may require renewal or development spending. That capital requirement sits outside this calculation.

Check: if the question had provided EBIT of $184,000 and stated that it already included depreciation and amortization, the same bridge would apply. Do not add back depreciation twice merely because it also appears elsewhere in a supporting schedule.

Scenario 2: Separate the components before adding them

Harbor & Field Foods reports operating income of $92,500. A detailed schedule lists depreciation of $11,750 and amortization of $2,250. Management also mentions a $6,000 product-launch campaign and suggests that it was unusual. The question asks for reported EBITDA, not adjusted EBITDA.

Work it through

Reported EBITDA = operating income + depreciation + amortization

Reported EBITDA = $92,500 + $11,750 + $2,250

Reported EBITDA = $106,500

The campaign does not enter this requested calculation. It is an operating expense, but it is not depreciation or amortization. Adding it back would create a different measure—an adjusted EBITDA figure—and would require a separate explanation. Calling the campaign “unusual” is not itself a calculation rule or evidence that the expense should be excluded.

If management has a documented, consistently applied policy that permits a particular launch cost to be excluded, the arithmetic of a proposed adjusted figure would be $106,500 + $6,000 = $112,500. That number should be labelled adjusted EBITDA, with the $6,000 adjustment shown separately. It should not replace the reported EBITDA result or be presented as though the expense never occurred.

This distinction matters because operating expenses can recur in changing forms. A company may launch a new product every year, even if each launch concerns a different product. A single campaign can be non-routine in its exact details while product marketing remains an ordinary feature of the business. The analyst should ask what the policy means by unusual, whether the cost is actually discrete, and whether similar spending has appeared in earlier or later periods.

Check: the components add to $14,000: $11,750 + $2,250. Adding only depreciation would yield $104,250, understating the stated EBITDA by $2,250. Adding the campaign without labelling the result would instead overstate reported EBITDA by $6,000.

Scenario 3: The $40,000 relocation adjustment

A company has a baseline EBITDA of $310,000. Management proposes adding back a $40,000 relocation cost, arguing that the move was non-recurring. Calculate the proposed adjusted figure, then decide what evidence is needed before accepting the adjustment.

The arithmetic

Proposed adjusted EBITDA = baseline EBITDA + proposed add-back

Proposed adjusted EBITDA = $310,000 + $40,000

Proposed adjusted EBITDA = $350,000

The calculation is straightforward; its interpretation is not. The $350,000 result assumes the full relocation expense is eligible for adjustment. The number is therefore a proposal until the underlying expense and the company’s adjustment policy have been tested. The reported baseline remains $310,000; the proposed adjustment does not rewrite reported earnings.

What should support the add-back?

• A ledger-level reconciliation. Request the general-ledger entries that make up the $40,000. A supplier invoice, moving-company bill, lease-exit charge, employee reimbursement, or temporary storage invoice should be identifiable and tied to the stated total. The schedule should reconcile exactly to $40,000 rather than relying on a rounded management estimate.
• Evidence that the cost was incurred. Invoices, contracts, payment records, and approval documents establish what was paid or accrued, when it was recognized, and which entity recorded it. An adjustment should not be used to add back a forecasted cost that never appeared in the baseline.
• A clear connection to the move. The supporting schedule should distinguish direct relocation costs from ordinary occupancy, repairs, or routine operating expenses that happened during the same period. Timing alone does not make an expense relocation-related.
• Evidence about recurrence. Review prior-year and subsequent-year expenses, board or management plans, lease documents, and the company’s operating footprint. A one-time move between sites may be genuinely unusual. A business that routinely opens, closes, or relocates branches may face recurring relocation costs, even if each individual move is distinct.
• Consistent treatment. Check whether comparable costs were adjusted in prior periods and whether gains or reimbursements connected with the move are also reflected. Excluding costs while retaining related benefits can produce a selectively favorable measure.
• A defined adjustment policy. The policy should explain what qualifies as non-recurring, who approves adjustments, and how the company treats similar expenses across periods. The label “one-time” is not a substitute for a rule that can be applied consistently.

Suppose the ledger supports only $33,000 of eligible, directly attributable relocation costs. The remaining $7,000 consists of ordinary rent and cleaning that would have been incurred regardless of the move. Under that fact pattern, the adjusted calculation would be $310,000 + $33,000 = $343,000, not $350,000. The conclusion changes because the evidence changes—not because the addition is difficult.

Now suppose the company expects to move another operating site every year as part of a planned network redesign. That pattern weakens the case for describing the entire category as non-recurring. The $40,000 can still be disclosed as a specific expense, but an analyst may reasonably leave it in a recurring-performance measure or show both figures with a clear explanation.

Relocation also raises a useful classification question: was the cost included in the $310,000 baseline in the first place? If it was recorded below operating income and the baseline was calculated from operating income without that item, adding it again could double-count the benefit. Before adjusting, trace the expense through the income statement and the reconciliation. An add-back can only reverse an expense that reduced the starting figure.

A compact answer key

Where calculations commonly go wrong

Mixing reported and adjusted figures. EBITDA calculated by adding depreciation and amortization to operating profit is not automatically the same as a management-defined adjusted EBITDA measure. Keep the labels exact and show each adjustment as its own line.

Adding back an item that did not reduce the baseline. If an expense is outside the starting earnings figure, adding it back inflates the result. Trace the item to the statement and reconciliation before calculating.

Treating a proposed adjustment as established fact. The $350,000 relocation result is arithmetically correct given the proposal. Whether it is analytically persuasive depends on support, recurrence, classification, and consistent policy.

Confusing expense recognition with cash flow. EBITDA does not show whether a bill has been paid, whether capital expenditure is needed, or how much cash remains after working-capital changes and debt service. It is an earnings measure, not a cash balance.

Rounding too early. Carry exact amounts through each line and round only the final result when necessary. In a small example, rounding may seem harmless; across several adjustments, it can obscure a reconciliation difference.

A practical discipline for every worked problem

Write down the starting line item before touching the calculator. Identify whether it is operating profit, operating income, or a stated EBITDA baseline; those labels should not be silently treated as interchangeable in an unfamiliar statement. Then list the permitted additions, calculate them separately, and show the total. If the question includes a proposed adjustment, place it below the core EBITDA calculation rather than folding it into the same subtotal.

For example, a clean presentation of the relocation case is: baseline EBITDA, $310,000; proposed relocation adjustment, $40,000; proposed adjusted EBITDA, $350,000. That format lets another reader reproduce the calculation and challenge the adjustment without disputing the baseline arithmetic. If only $33,000 is substantiated, revise the adjustment line and preserve the same transparent structure.

In practice, a strong answer is not merely a number. It is a number with a visible bridge, a precise label, and a short statement of what remains unverified. That standard keeps a simple earnings exercise from becoming an exercise in wishful accounting.