United States
Environmental Protection
Agency
Office Ot Enforcement
(LE-133)
21 E-20C5
October 1991
oEPA ABEL
User's Manual
A Model To Estimate
A Firm's Ability To Finance
• Civil Penalty
• Superfund Clean-up
• Pollution Control Expenditures
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ABEL. User's Manual
(U.S.) Industrial Economics, Inc., Cambridge, MA
Prepared for:
Environmental Protection Agency, Washington, DC
1 Oct 92
l:
MHHI mn OTSMM OTP
NIK
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bibliographic information
PB92-230366
Report Nos: none
Title: ABEL. User's Manual.
Date: 1 Oct 92
Performing, Organization: Industrial Economics, Inc.. Cambridge. MA.
PerformiOrganization Report Nos: EPA-21E-2005
Sponsoring Organization: -Environmental Protection Agency. Washington, DC. Office
of Enforcement,
Supplementary Notes: Sponsored by Environmental Protection Agency, Washington, DC.
Office of Enforcement.
KTIS Field/Group Codes: 68. ?0F
Price: PC A08/MF A02
Availabi1i ty: Available from the National Technical Information Service,
Springfield, VA. 22161
Number of fages: 17««p
Keywords: ^Penalties, "Businesses, ftEconomic analysis. Fines(Charges), Reclamation,
Costs, Pollution control equipment. Taxes, Administration. Documentation,
frEnvironmental Protection Agency, Ability to pay,
abstract: The manual provides steF~by_step instructions for using the ABEL model.
The model is a computer program designed to assist EPA in assessing a firm's
ability to finance one or more of the following items: a civil penalty; new
investments in pollution control equipment: and environmental clean-up costs.
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PB92-2303b6
10/1/92
ABEL User's Manual
l!,5, Environmnetal Protection Agency
Office of Enforcement Policy
401 M Street SW
Washington, DC 204f>0
see Online acce>3 to the EPA/NCC databases
DO NOT INCLUDE THIS FORM WITH DOCUMENTATION
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ABEL L'SKR'S MANUAL
Prepared for:
Program Development and Training Branch (LE-iB)
Office of Enforcement Policy
Office of Enforcement
United States Environmental Protection Agency
401 M Street. S.W.
Washington, D.C. 20460
(FTS-260-6777)
Prepared by-
Industrial Economics, Incorporated
2067 Massachusetts Avenue
Cambridge, Massachusetts 02140
617-354-0074
September 1991
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ABEL USER'S MANUAL
COMMENT FORM
The Office of Enforcement is very interested in your comments on this ABEL User's
Manual. After you have had a chance to use the mrnual a few times, please fill out this comment
form and return it to:
Jonathan Libber, LE-133
U.S. E.P.A.
401 M Street, S.W.
Washington. D.C. 20460
If there are any significant errors in the manual, or it needs to be updated in some
fashion, we will mail out revised pages to the names rn our mailing list Thus, it is important that
you add your name to that list, if it is not already on it
i
§SKtsn&SLl22i
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I. INTRODUCTION
EUcettent Saiabcuxy Poor No Opuioa
A. Clarity
B- Usefulness
C. Additional Comments:
n. USING THE COMPUTER PROGRAM
fiKcflttrt $itirf»cio*y foor No OptwMi
A. Clarity
B. Usefulness
C Additional Comments:
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DATA REQUIREMENTS
Basdteat SuatMoy Poor No Op—
A. Clarity
B. Usefulness
C. Additional Comments:
INTERPRETING OUTPUT
Dai *¦! SmMmmht Poor NoOpMoa
A. Garity
B Usefulness
C. Additional Conunenu:
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V. SAMPLE SESSION
EsccUcal Sa(i£actory Poor No Opinioa
A. Garity
B. Usefulness
C. Additional Comments:
VI. APPENDICES
No Opiates
A. Qarity
B. Usefulness
C. Additional Commc's:
IV
September 1991
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NAME OF COMMENTER:
Would you like to be placed on the mailing list (Y/N)'.'
Would you like to acquire a USER ID (Y/N)?
(If yes to either of these questions, include your address below)
MAILING ADDRESS: PHONE NUMBER:
FES
L_L
(Federal employees should list both
their FTS number and their
commercial number)
Please mail to: Jonathan Libber. LE-133
U.S. Environmental Protection Agency
401 M Street, S.W.
Washington, D C. 20460
V
September 1991
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TABLE OF CONTENTS
INTRODUCTION CHAPTER 1
A. OVERVIEW 1-1
B. PURPOSE OF THE PROGRAM 1-3
C DEFINING "ABILITY TO PAY" 1-4
D. HOW TO USE THE MANUAL 1-5
USING THE COMPUTER PROGRAM CHAPTER 7
A. STRUClURE OF THE PROGRAM 2-1
B. ENTERING THE DATA 2-2
1. Logging On and Starting the Program 2-2
2. General Information 2-3
3. Entering Data for the ABEL Analysis 2-6
4. Format of the Data Entries 2-7
5. Correcting Typing Errors "2-8
6. Error Messages 2-9
a. Unavailable or Out-of-Range 2-9
b. Format Error 2-12
c. Illegal Character 2-12
DATA REQUIREMENTS CHAPTER 3
A. REQUIRED FINANCIAL DATA - PHASE I 3-2
1. Introduction 3-2
VI
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TABLE OF CONTENTS
(continued)
2. Background Information 3-2
a. Name ot Firm 3-3
b. Statute 3-3
c. Analysis Date 3-4
d. Years of Data Available 3-4
e. Most Recent Year of Data 3-5
f. Data Units 3-5
3. Income Tax Return Data 3-6
4. Phase I Verification Checks 3-13
B. REQUIRED FINANCIAL DATA ~ PHASE II 3-15
Penalty, Pollution Control Expenditures,
and Clean-Up Costs 3-16
a. Pollution Co..t:o! Investment Date/
Penalty Payment Date 3-15
b. Proposed Lump-Sum Settlement Penalty . . 3-16
c. Depreciable Capital Cl si of New Investment 3-17
d. Non-Depreciable, Non-Tax-Deductible
One Time Costs 3-18
e. Non-Depreciable but Tax Deductible
One Time Cost 3-18
f. Annual Costs 3-19
2. Reviewing Phase II Inputs 3-20
3. Variables with Standard Values 3-20
a. Reinvestment Rale 3-21
b. Marginal Income Tax Rate 3-22
c. Annual Inflation Rate 3-26
d. Discount Rate 3-28
e. Weighted Average Smoothing Constant 3-29
4. Effect of Changes to Standard Value Variables 3-31
5. Phase II Data Verification Checks 3-35
vii
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TABLE OF CONTENTS
(continued)
INTERPRETING ABEL RESULTS CHAPTER 4
A. PHASE I ABEL ANALYSIS 4-1
1. Background 4-1
2. Sample Output 4-3
a. Summary Table of Historical Financial
Ratios 4-3
b. Detailed Explanation of Financial Ratios 4-5
c. Historic Ratio Comparison 4-9
d. Summary Phase I Conclusion 4-10
B. PHASE n ABEL ANALYSIS 4-10
1. Overview 4-10
2. ABEL Summary Analysis 4-12
a. Phase II Summary Table 4-12
b. Detailed Explanation of the Components
of the Summary Analysis 4-14
c. Determining if the Violator Can Pay at
the 70 Percent Probability Level 4-17
d. Historic Comparison 4-18
3. Other Phase II Analysis Options 4-19
a. Option 1: Penalty Payment Over
More than One Year 4-20
b. Option 2: Historical Cash Flow
Information 21
c. Option 3: Detailed ABEL Summary
Analysis 4-22
d. Option 4: Modify Phase II Inputs 4-25
e. Option 5: None of the Above, Proceed
to ABEL Output Menu 4-25
viii
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TABLE Of CONTENTS
(continued)
SAVING, RETRIEVING AND PRINTING
ABEL FILES AND EXITING THE PROGRAM CHAPTER 5
A. SAVING DATA TO AN INPUT FILE 5-1
1. Saving Input Data Using the "S* Command 5-1
2. Saving Input Data When Exiting the Program 5-2
3. Ovctwriting an Existing File When Saving
Input Data 5-3
B. RETRIEVING DATA FROM AN INPUT FILE 5-3
C. PRINTING ABEL OUTPUT AND EXITING THE PROGRAM 5-5
1. Accessing the ABEL Output Menu 5-5
2. Concluding an ABEL Analysis 5-6
3. Receiving a Printout from the Mainframe 5-7
SAMPLE SESSION CHAPTER 6
ABEL DATA ENTRY FORMS APPENDIX 4
TECHNICAL APPENDIX APPENDIX B
A. PHASE I FINANCIAL RATIO CALCULATIONS B-t
1. Overview B-l
2. Debt to Equity Ratio B-l
3. Current Ratio B-4
4. Times Interest Earned Ratio B-4
5. Beaver's Ratio B-5
6. Altaian's Z-Score B-6
ix
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TABLE OF CONTENTS
(coif ancd)
B. PHASE II CALCULATIONS B-7
1. Overview B-7
2. Detailed Ability to Pay Calculations B-8
USING ALTERNATIVE FEDERAL TAX FORMS APPENDIX C
x
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INTRODUCTION
CHAPTER I
A. OVERVIEW
This manual provides step-by-step instructions for using the ABEL model. The model is a
computer program designed to assist EPA in assessing a firm's ability to finance one or more of the
following items:
o a civil penalty;
o new investments in pollution control equipment; and
o environmental clean-up costs.
For the purposes of this manual, these items are collectively referred to as "environmental
expenditures."
ABEL is designed to evaluate the financial health of corporations. The model uses a
consistent set of financial data, namely the corporation's federal tax returns, to make this evaluation.
Besides providing a consistent set of information, tax return data also allow for the analysis of private
corporations, which are typically more difficult to analyze because financial data on these firms are
generally not publicly available. An understanding of economic or financial theory is not necessary
when using ABEL. This manual provides all the information needed to run the program and
interpret the results.1
1 For information on how to obtain access to the ABEL program, see the ABEL User's
Guide.
1-1 Sypteiflfcr
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The ABEL model is part of an ongoing EPA effort to evaluate (he financial health of firm
involved in enforcement proceedings.2 ABEL may often serve as an adjunct to other computer
programs used for enforcement purposes, such as BEN or the Superfund Financial Assessment
System (SFAS). BEN is used to calculate the economic benefits a violator derives from delaying or
avoiding compliance with environmental statutes. SFAS utilizes publicly available information to
assess a firm's ability to fund remediation costs at Superfund sites. ABEL, while similar to SFAS,
treats certain issues in a more sophisticated manner and offers the user greater flexibility in the types
of analyses that can be performed. Therefore, in certain instances, ABEL may be more appropriate
tbt
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it goes to trial or hearing.4 If the model yields an indctermir.atc answer or determines an inability
to pay, however, the user should conduct additional financial analyses before reducing a civil penalty,
as even firms with poor cash flow often have sufficient resources to pay for environmental
expenditures. These analyses may involve reviewing additional financial information on the firm, or
analyzing sections of the firm's tax forms not utilized in the ABEL model.
One crucial, but often overlooked, policy matter is that the Agency will not automatically
reduce a penalty even when a violator proves conclusively that it cannot afford to pay. The Agency
will not reduce the civil penalty for inability to pay in following situations:
o the violator . efuses to comply with pollution control requirements:
o the violator ca mot afford to comply with pollution control requirements; or
o the violator's co. duct was egregious (e.g. willful violations, or violations that
might have or actually endangered lives).5
B. PURPOSE OF THE PROGRAM
ABEL is used as part of EPA's penalty development process, where Agency staff need an
assessment of a firm's ability to pay for environmental expenditures or a penalty. ABEL is frequently
used with EPA's BEN computer model. BEN calculates the economic benefit a for-profit or not-for-
profit firm receives from delaying or avoiding compliance with EPA regulations. This economic
benefit is one of the factors the Agency considers in assessing penalties for violators.
4 If the ability to pay issue is going to be raised at a trial or hearing, the Agency should be
prepared to explain where the funds to pay for compliance, clean-up or penalties are going to come
from. In order to do that, you may need to use an expert. Agency personnel are strongly advised
against using the ABEL model in a trial or hearing, as it is biased in favor of the violator (it only
handles the cash flow part of the analysis) and it is unlikely that a trier of fact will fully comprehend
the complex analysis that ABEL performs. In a trial or hearing, it is usually far more effective to
explicitly identify potential sources of fund*.
5 For more guidance see "Guidance on Determining a Violator's Ability to Pay a Civil Penalty",
December 16, 1986, codified as GM-56 in the Geieral Enforcement Policy Compendium.
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It is important to remember that ABEL ^as been designed to evaluate a firm's claim regarding
its ability to pay after the initial penalty has been proposed. The burden of proof remains oo the
violator to support its claim of inability to pay. Given the violator's incentives to avoid large penalties
and investments, many firms will initially claim inability to pay regardless of their financial health.
C. DEFINING "ABILITY TO PAY"
The type of analysis ABEL performs is often generically referred to as an "ability to pay"
analysis because the program is analyzing a firm's ability to pay a penalty or an environmental
expenditure. When interpreting the results of the ABEL analysis, it is important to understand what
is meant by ability to pay, as there is no strict definition in an economic or financial sense. A firm's
ability to Gnance environmental penalties or expenditures depends on the level of financial distress
one is willing to impose on the firm. For instance, a very simple measure of a firm's ability to pay
might be how much cash or liquid assets (such as certificates of deposit) the firm has immediately
available. Other more stringent measurer might require the firm to rely on its future earnings to
finance an environmental expenditure. Examples of future earnings that could be used to fund these
expenditures include internally generated cash flows, loans on unlevered assets, the sale of assets, and
the sale of stock.6 Finally, for cases involving non-incorporated businesses, the Agency or a court
may look at the personal assets of the owners in determining their ability to meet a penalty
assessment.7
After analyzing some basic financial ratios that reflect firm solvency, ABEL assesses a firm's
ability to pay by focusing on projected cash flows. The model explicitly calculates the value of
projected, internally generated cash flows from historical tax information, and compares these cash
flows to the proposed environmental expenditure(s). This measure of ability to pay is more stringent
than measures of cash or liquid assets on hand, but less stringent than the legal liability of the firm's
owners.
4 Internally generated cash flow reflects the income that a firm has generated from ongoing
operations, less all cash expenses, including taxes.
7 For incorporated firms, liability is limited to the value of shareholder's equity.
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D.
HOW TO USE THE MANUAL
This manual provides step-by-step instructions tor using the ABEL model. Chapter 2
describes how to operate the ABEL computer program. This chapter explains how the program is
structured and how to enter data. Chapter 3 provides detailed information about all aspects of the
program's data requirements. Chapter 4 explains how to interpret ABEL's output. This chapter also
includes numerous illustrations of '.he output prog.am. Chapter 5 details ABEL's printing, saving and
retrieving options. Chapter 6 provides a sample ABEL session, including all user inputs, computer
prompts, and program output. All chapters provide examples directly from the program. These
examples have been put in shaded boxes to distinguish them from the text of the manual.
There are also three appendices to this manual. Appendix A contains the ABEL Data Entry
Forms. Appendix B provides the financial equations used by ABEL to generate its results and
Appendix C provides guidance on using tax forms other than Form 1120 or 1120-A.
Before using the program for the first time, you should thoroughly read all six chapters of this
manual. It is not necessary, however, that you read or understand Appendices A, B, or C.
Appendix C should be read before analyzing firms that do not file corporate tax return Forms 1120
or 1120-A. This appendix contains guidance on performing ABEL analyses of firms that file
Form 1065, Form 1120-S and the Sole Proprietorship form.
If you need assistance in operating the program, understanding the results, or other guidance
in effectively using ABEL, contact the Program Development and Training Branch at 202-260-6777
or FTS-260-6777.
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USING THE COMPUTER PROGRAM
CHAPTER 2
ABEL it an interactive computer program designed to operate in a time-sharing mode or on
a personal computer (PC)- This chapter provides a detailed description of the b*MC requirements
for entering data and running the ABEL program. This chapter should be used in conjunction with
Chapter 3, which describes ABEL's data requirements.
Chapter 2 is divided into two sections. Section A briefly describes how the computer program
is structured and provides an overview of the choices that ABEL presents during program execution.
Section B provides data format requirements and directions for entering data into the ABEL model.
Section B also illustrates the error messages ABEL provides if data are entered improperly.
A. STRUCTURE OF THE PROGRAM
ABEL requests information on the firm's historical financial condition, and, based on this
information, evaluates the firm's ability to pay environmental expenditures. In Phase I of ABEL, the
program uses ooe to five years of federal income tax data to calculate five ratios that indicate the
financial health of the organization. Based on these ratios, ABEL develops a general assessment of
the firm's current financial condition.
If at least three years of the firm's tax data are available, ABEL can also perform a Phase II
analysis. In Phase 0, ABEL assesses whether the firm will be able to pay for the environmental
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expenditure that you propose. After you provide ABEL with information on proposed environmental
expenditures, the model estimates the probability that the firm can pay for these costs out of
internally generated cash flows. Phase II also gives you the option of reviewing more in-depth
information, such as a breakdown of the firm's historic cash flows.
After you have completed Phase II. ABEL will ask you to select an output format for the
results of your analysis. Next, ABEL will give you the choice of modifying your Phase I inputs,
evaluating another firm, or concluding the session. If you choose to evaluate a different firm, .ABEL
will give you the opportunity to save all of your Phase I and Phase II input values to a computer file,
before resetting all values and returning to the beginning of the program. If you choose to conclude
the AfiEL session, the program will allow you to save the most recent input values to a computer
file before quitting the proginn.
B. ENTERING THE DATA
1. Lo«
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2. Gwtnil Information
ABEL is an interactive computer program. The terminal prints or displays a question and
then waits for you to type an answer. The cursor (or print head) returns to the beginning of the next
line after printing each prompt.1 Be aware that if you are using ABEL on the EPA mainframe (as
opposed to the PC version of the program) there might be slight hesitations in the computer's
response because of the time-sharing mode. Messages sent to and from the computer compete for
time with messages to and from other time-sharing users. Many long hesitations indicate increased
use of the mainframe.2
ABEL is different from most PC software programs (such as spreadsheets) in that its user
interaction is linear, as opposed to page-oriented. This means that you cannot "back-up," or edit an
entry which you have already made. Instead, you must enter a B for "Back* to return to the previous
quo .ion. If you need to go back several steps, you should enter B followed by a carriage return, the
appropriate number of times. In the illustration below, the user went back two lines to data item 5,
where the use' changed the entry from 500 to 5000.
1 If you are using a TTY, you should wait until the entire prompt is printed and the print head
has returned to the next line before entering data.
2 Another type of delay can occur if you have not used the program in the previous two weeks.
In this case, the mainframe will need to pull information from archives, and you will be put "on hold"
until this procedure is completed. The computer will let you know that this is occurring by giving you
a prompt preceded by "ARC."
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7. Please enter ^ iai Deductions
(in Thousands)
B
6. Please enter Net Operau. _ * . i^eductions
(in Thousands)
(Current Value - 2200, press ENTER to retain it)
B
5. Please eater Taxable Income Before Net Operating Lots
(in Thousands)
(Current Value « 500.00, press ENTER to retain it)
5000
Other useful features in the data entry portion of ABEL are the V (for "View"), H (for
"Help"), S (for "Save"), and Q (for "Quit") keys. During Phase I, typing a V followed by a carriage
return will produce a menu which allows you to choose the year of tax data you wish to view. ABEL
then allows you to examine the data you have entered, as shown below.
M
8. Please enter Total Tax
(in Thousands)
V
You have entered data for 1989,198&.
Which year of data would you like to view?
Select:
1.1989
2.1968
R. Resume entering data
Typing an H followed by a carriage return will provide a brief explanation of the information
required. Specifically, you may be told why the input is requested, where to obtain it, or who to call
if you have any questions. After the "Help" explanation has been printed on the computer screen,
ABEL will prompt you again for the requested information. An example of a "Help" statement is
illustrated below.
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You have entered Phase I data for 1989, 1988, 1987.
Which year of data would you like to review?
Select:
1. 1989
2. 1988
3. 1987
G. Go on to Phase I results
H
Help:
At this time, ABEL allows you to review any of your data
inputs before proceeding with the Phase I analysis. To review the
data inputs for a particular year, type the appropriate number that
corresponds to that year. If you would like to proceed directly to
the Phase I results, type "G" to do so.
Press carriage return (or ENTER) to continue.
Typing an S followed by a carriage return allows you to save your Phase I inputs at any time
during the data entry process. If for some reason you cannot complete an ABEL analysis in one
session, this option allows you to save your inputs even if you have not finished entering the tax data.
At a later time, you may retrieve this file and resume entering data. Your data files will remain in
your user account for 14 days. File saving procedures are discussed in greater detail in Chapter 5.
Typing a Q followed by a carriage return allows you to leave the ABEL program at any time.
If you decide to quit, ABEL will ask if you want to save your inputs before you leave the program.
As a safety feature, ABEL always asks you to confirm that you want to leave the program.
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12. Please enter Trade Notes & Accounts Receivable Less Bad Debts
(in Thousands)
Q
,M YOU ARE ABOUT TO EXIT ABEL •••
Do you want to save your inputs first (Y = yes, N = no}?
N
Are you sure you want to quit (Y = yes, N = no)?
Y
3, Entering Data for the ABEL Analysis
After the introduction, ABEL provides the following message, which lets you choose how to
enter your data:
How will you enter data for the ABEL analysis?
1. Enter data during ABEL session.
2. Use a previously saved file.
Eater your selection (1 or 2):
I
If you are entering a firm's data for the first time, you should type 1. If you have already entered
and saved a firm's data and would like to retrieve these data, type 2. Chapter 5 describes in detail
how to create and retrieve an input file.
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4. Format of the Data Entries
ABEL data entries require specific formats. All numerical values must be entered without
commas, dollar signs, or percent signs. For example, a S 10.000 interest expense should be entered
as 10000. In addition, many of the Phase II data entries require both a dollar amount and the year
in which the dollars are expressed.1 For example, if you are entering a one-time pollution control
expense of $225,000 based on 1989 dollars, your ABEL entry should be 225000 1989.
Throughout this manual and in the ABEL program itself, we refer to the year of the dollars
in which an expenditure is expressed as the "year-dollars."4 In the above example, the costs are
stated in 1989 year-dollarc. The year-dollars must contain four digits.
Some data entries represent percentages. You should enter these as a number without a
percent symbol (e.g.t enter 20.4 to represent 20.4%). If you are entering a number with a fractional
value, such as 1/3, you need to translate the fraction to decimal value (e.g., enter 0.33 to represent
1/3).
Be careful to use only number keys to enter numerical values. A common mistake is typing
the lowercase letter L instead of the number 1. Ano'her error occurs when the letter O is typed
instead of the number 0 (zero).
ABEL requires a specific format for each data entry. If you do not follow the exact format,
ABEL prints an explanatory error message and then reprompts you for the correct entry. After you
correctly type the entry, press the carriage return (or "ENTER" key) to transmit the data and signal
to the computer that you are ready for the next prompt
1 These data entries are identical to the format used in the BEN Model for pollution control
capital costs, one-time expenditures, and annual costs.
4 In calculating cash flows, ABEL converts certain Phase II dollar inputs (pollution control
expenditures and annual costs) into dollars of the year in which the firm will be investing in pollution
control equipment and/or paying a penalty. This dollar-year conversion is necessary to make tbe costs
comparable on an inflation-adjusted basis.
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ABEL allows you to round data inputs to thousands or millions of dollars if you wish to do
so. In order to produce a reliable ABEL analysis, you must enter all of the data in consistent units
of measure. Thus, all costs and tax data must be entered in dollars, thousands of dollars, or millions
of dollars. If, for example, the firm has sales of several million dollars, you may choose to make all
entries in units of millions of dollars to minimize the number of digits that you need to enter for each
input value. If this is the case, you should indicate that you are using units of millions of dollars, and
input the tax return, pollution control expenditure, and penalty values after they have been divided
by 1,000,000. Note that ABEL requires that all numerical values be eight digits or less in length.
5. Correcting Typing Errors
After typ. your entry you may discover that you have typed an incorrect letter or number.
If you have not yet pressed the carriage return (or "ENTER" key), correcting the mistake is
straightforward. Simply press the "BACKSPACE" key for each character that you wish to delete, and
type in the correct information. For example, if you had typed 10,234 and wanted to delete the
comma, you would press the "BACKSPACE" key four times, type 234, press the "SPACE BAR" once
to delate the extra 4, and then press the carriage return (or "ENTER" key). If you are using a PC,
the cursor will erase each figure as you press the backspace key, and your corrected entry will appear
on the screen.5 Since you corrected the mistake before hitting the carriage return (or "ENTER"
key), the terminal sends 10234 to the computer, instead of the 10,234 entry that you originally typed.
If you discover the error after you have pressed the carriage return (or "ENTER" key), the
terminal will send the incorrect entry to the computer. If your entry contains an unacceptable
character, ABEL will print an error message and reprompt you for a corrected input. ABEL will not
detect an error if you simply enter an incorrect value. For instance, if you type 10244 instead of the
intended value of 10234, your calculation will be based on an erroneous input You can correct the
J If you are using a TTY, the print head will move one space backwards each time you press the
backspace key. Since the original entry is already typed on paper, the backward movement will not
erase figures that are being deleted. Rather, your corrected entry will be typed on top of the original
entry.
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error immediately by typing B, which will direct ABEL to repeat the previous data prompt and show
you the current value for that item Alternatively, you can type V at any time which will allow you
to view your data inputs and correct any error you may have made.
6. Error Mamts
Occasionally, you might forget to follow the format rules when typing data entries, or you
might select an option number that does not exist. In such instances, ABEL will alert you to the
mistake. After displaying a message identifying the error, ABEL will prompt you to re-enter the data
in the correct format
There are three general types of mistakes that generate error messages: out-of-range input
values, format errors, and illegal characters. Each of these error messages is described below.
Examples from ABEL sessions illustrate each error and the related correction; user entries are shown
in bold-face print.
a. VmrethW? 9T Qqt-of-Ranr
If you choose an option that was either not presented or not in the allowable range, ABEL
win print an error message. For example, when ABEL asks you if you would like an introduction,
you must respond with a yes (Y) or no (N) answer. In the following example, the user mistakenly
typed 1 to indicate the first choice instead of typing Y to signify yes.
2-9
ftpftrnftw W1
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Welcome to ABEL ABEL evaluates a firm's ability to pay pollution
control expenditures, environmental cleanup costs, and/or a civil
penalty. This version of ABEL was introduced in 1991.
Would you like an introduction (Y =yes. N=no)?
I
ERROR: THE ABOVE ENTRY IS NOT AN AVAILABLE OPTION. PLEASE ENTER
AGAIN.
Welcome to ABEL. ABEL evaluates a firm's ability to pay pollution
control expenditures, environmental cleanup costs, and/or a civil
penalty. This version of ABEL was introduced in 1991.
Would you like an introduction (Y-yes, N=no)?
If
ABEL recognizes the error, prints an error message, and reprompts the user for the correct
information with the same question. The user then correctly typed Y, which is one of the available
response options. This error message will appear whenever you type anything other than Y or N to
the above question.
The next example involves a response which is out-of-range. Hie user asks to change
Variable 30, when in fact there are only Variables 1 through 26. As illustrated in this example,
ABEL prists an error message indicating that the entry is an illegal value.
2-10
September 1991
-------
The following 1989 data have been entered (in Thousands):
19. Other Current Liabilities
1300.00
20. Loans from Stockholders
700.00
21. Mortgages, Bonds Payable in One Year or More
900.00
22. Other Liabilities
350.00
23. Appropriated Retained Earnings
.00
24. Unappropriated Retained Earnings
1500.00
25. Total Liability and Stockholders' Equity
7600.00
26. Income Recorded on Books not Included in Return
.00
Enter the number of the vahie you wish to change (e.g. enter 19 to change Other Current
Liabilities ).
Enter G(o) to return to year-selecting screen.
Enter B(ack) to display previous screen.
30
ERROR: THE ABOVE ENTRY IS AN ILLEGAL VALUE. PLEASE ENTER AGAIN.
Another instance where an entry can be out-of-rangc is when a negative value is entered for
a value that can only be positive. For example, the "Accounts Payable" data item will always be a
positive number. If a negative value is entered, ABEL prints the following error message:
17. Please enter Accounts Payable
(in Thousands)
•500
ERROR: THIS INPUT CANNOT BE A NEGATIVE NUMBER. PLEASE CHECK
YOUR TAX &ATA AND ENTER AGAIN.
17. Please enter Accounts Payable
(in Thousand!)
(Current Vahie * -500.00, press ENTER to retain it)
1750
2-11
September 1991
-------
k Format Error
The second type of general error message involves the format of the data item. If you enter
the data in an unacceptable format. ABEL will issue an error message. In the example below, the
user incorrectly typed a comma when entering a dollar amount.
17. Please enter Accounts Payable
(in Thousands)
1,750
ERROR: AN ILLEGAL CHARACTER EXISTS IN THE ABOVE ENTRY. PLEASE
ENTER AGAIN.
17. Please enter Accounts Payable
(in Thousands)
(Current Value » .00, press ENTER to retain it)
c. Illegal Character
The final type of general error message occurs if you enter an illegal character. Matt
commonly, the user types a character that does not belong to the time alphanumeric category as the
rest of the entry. For example, typing $10000 as a cost entry generates an error message because a
dollar sign is not a number. Similarly, typing 20* to enter *20 percent" is not acceptable because
20% contains the oonnumeric percent sign. One very common mistake, illustrated be low, is to type
the lowercase letter L instead of the number 1 when entering numeric values.
2-12
gfpitmfrr I m
-------
17. Please enter Accounts Payable
(in Thousands)
1750
ERROR: AN ILLEGAL CHARACTER EXISTS IN THE ABOVE ENTRY. PLEASE
ENTER AGAIN.
17. Please enter Accounts Payable
(in Thousands)
(CurTent Value = .00, press ENTER to retain it)
Another common mistake is typing the letter O instead of the number 0 (zero) when entering
numeric values. As in the above example, ABEL issues an illegal character error message before
reprompting for the correct information.
17. Please enter Accounts Payable
(in Thousands)
1750
ERROR: AN ILLEGAL CHARACTER EXISTS IN THE ABOVE ENTRY. PLEASE
ENTER AGAIN.
17. Please enter Accounts Payable
(in Thousands)
(Current Value = .00, press ENTER to retain it)
2-13
September 1991
-------
DATA REQUIREMENTS
CHAPTER 3
ABEL's analysis is based on data from the firm's past federal income tax returns. You should
ask the violator to produce three to five years of its most recent tax returns. ABEL is designed to
accept data directly from Forms 1120 and 1120A. or indirectly through the ABEL Data Entry Form.
ABEL also accepts information from three additional tax forms. Appendix C contains guidance on
using ABEL with Form 1I20-S, Form 1065 and the Sole Proprietorship Form.
The firm's most recent tax data are required for ABEL to produce a reliable analysis. If the
firm re-filed any 1120 or 1120-A forms for the years that you are using, it is essential that you obtain
the most up-to-date version of these forms. In addition, all returns submitted for an ABEL analysis
must be signed. One of the key advantages of using tax returns is that the violator has stated, under
the penalty of perjury, that the information provided on the tax form is true. Without the signature,
you have no guarantee that this information is accurate. If the violator no longer has signed copies,
the violator can obtain these from the IRS.
In order to evaluate a firm's financial condition using ABEL, you must understand its
relationship to other business entities. For instance, a violator may be the subsidiary of a large parent
corporation, or may be one of several closely related "sister" firms. While the violator may be filing
its own tax returns, it is easy for another entity to make the violator look artificially poor by
manipulating the violator's finances. In these situations, Agency personnel should insist on seeing
tax returns and other relevant financial reports from all related firms. This subject is discussed in
more detail in the ABEL User's Guide.
3-1
September 1991
-------
A. REQUIRED FINANCIAL DATA -- PHASE I
1. Introduction
Immediately after you enter the ABEL program, you will bo provided with a brief message:
Welcome to ABEL ABEL evaluates a firm's ability to pay pollution
control expenditures, environmental clean-up costs and/or a civil
penalty. This version of ABEL was introduced in 1991.
Would you like to see an introduction (Y^yes, N^no)?
If you are using ABEL for the first time, you may want a detailed introduction to the modeL
This introduction explains what ABEL does, describes how it will prompt you for information, and
lists formatting requirements for data entry. If you would like to read this introduction type Y,
otherwise type N.
2. Background Information
Immediately after the introduction, ABEL asks for background information about the case
that is being evaluated.
AAAAA BBBBBB F.FFFFF.F
A A B B E
AAAAA BBBBBB EEEEE
A A B B E
A A BBBBBB FFFFFFF
L
L
L
L
LLLLLLL
Version 2.0
July 1991
3-2
-------
a. Name of Firm
ABEL asks for the name of the firm you are analyzing. You may enter the firm's name or
another descriptive phrase that will identify the analysis. 1 he firm's name can consist of several words
separated by spaces (e.g., ABC Corporation). However, there is a twenty character limit on this
entry. The firm name will be printed on your ABEL output.
ABEL will now ask you for some background information on your case: U
1A. Please enter the name of the firm to be analyzed (e.g., ABC Corp.) 8
XYZ Corporation I
b. Statute
As illustrated below, ABEL asks you to identify the statute under which you are citing the
violator. If the violator is affected by more than one statute, you should select the most important
one. ABEL allows you to choose from 11 specific statutes, as well as an "other" option for statutes
that are not listed. This entry is for record-keeping purposes only. The selection of a statute does
not affect the ability to pay calculation.
September 1991
-------
IB, Please identify the statute involved in your case, if your case
involves more than one statute, please pick the most important one,
1. Clean Air Act - Stationary source
2. Qeao Air Act - Mobile source
3. Clean Water Art - 404
4. Clean Water Act - NPDES
5. FIFRA
6. UST (Underground Storage Tank)
7. RCRA (Other than UST)
8. Safe Drinking Water Act - UIC
9. Safe Drinking Water Act - PWS
10. Superfund
11.TSCA
12. Other
Enter the number of the statute you have selected:
10
c- AlPlrelf Pa«j
Enter the current date in any format. ABEL accepts 2/23/91 just as easily as February 23,
1991 or Feb. 23,1991. This date will appear on all of your printed outputs.
2. Please eater today's date (eg., June 1,1990):
February 23,1991
-------
You must supply ABEL with tax return data for consecutive year?. If the tax return data are
not from consecutive years' returns, your Phase I financial ratios will be correct, but the years
associated with these ratios will be mislabeled. In addition, your Phase II results will be unreliable.
3. Please Enter the Number of Years of Data Available
3
e. Most Recent Year of Data
ABEL asks you to enter the most recent year of tax return data that you have collected. For
example, if you have collected a firm's tax returns for 1987, 1988, and 1989, you should enter 1989
as the most recent year.
4. Please Enter the Most Recent Year
1989
I Date Units
You must tell ABEL the units in which you are going to enter the data: dollars, thousands
of dollars, or millions of dollars. For example, if you want to enter the firm's tax data in thousands
of dollars, enter 2 as shown below. This means that you must round off your data inputs to the
thousands place. In other words, if one of the firm's data items was Si0,346, you would enter 10 into
the ABEL program.
3-5
September 1991
-------
Please enter units that you are going to enter your data in:
1. Dollars.
2. Thousands of dollars.
3. Millions of dollars.
For example, if you choose "2", Thousands of dollars, you
must enter all data inputs in thousands of dollars (e.g.
$10,000 must be entered as *10".)
3. Income Tax Return Data
ABEL can handle up to 26 separate inputs from the most recent year's tax return and 25
inputs Crom all other years' tax returns.1 In addition to accepting inputs from the standard "U.S.
Corporation Income Tax Return Form 1120," ABEL also accepts inputs from Form 1120-A.2 Form
1120-A is very similar to Form 1120, but is designed for small corporations.3
Exhibit 3-1 shows a sample of the 1989 Form 1120 tax return. Each required data item is
marked with a number indicating its ABEL data entty item. Exhibit 3-2 lists the required inputs in
order, summarizing their locations on both Form 1120 and 1120-A tax returns. Exhibits 3-1 and 3-2
are provided for informational purposes only. When running the ABEL program, you do not have
to refer to these exhibits as the program provides you with the required tax form line numbers.
1 The most recent year requires one additional tax return input to estimate when the outstanding
net operating Ion that is carried forward, if any, will be used up. In Exhibit 3-2, this input is data
item #6, "NOL Deductions."
2 See Appendix C for instructions on using other tax forms with ABEL.
3 In 1989, one criterion a firm had to meet to file Form 1120-A was that its gross sales, total
income, and total assets each be under $500,000.
3-6
September 1991
-------
Exhibit 3-1
LOCATION OF FINANCIAL DATA ON 1989 FORM 1120
.1120
Wtwnr
U.S. Corporation Income Tax Return
'¦(MMimriNliiinmiHeMI lMf. uw)
*¦ mtnicliofli arc noenu Sm mi 1 far Pioerwen BUuuiuii Act Nonce.
. It
CMONo 1S4*0UJ
t®89
>i a—
• CcnsCMOtltO flUC '
1 Pfionai rodv^oa
C PfterwMvwcr
moinwww
*fr»0 *•*» HC
: ui4r^N —*
"¦tm/CCTTil ..J
Use ,
in
| rtyns*>
13a Salaries ana wafts i
:14 Reoairs
Bad a«ots.
"ems
Ta«a*
b lass ions creoitL
" '
. c Balance ~ ¦ 13c i
14 I
S I
£ I
; is
at
117
U*
119
20
121
!"
j 23
!"
29
JILL
16 I
JL1
26
I
ComnDutions (sm iwiuimium lor 10% limitation)
Oaoracoticn (attacn Form 4562) I 20 I
Laaadeoreciationeiunied on Schedule A and eisewnera on renim. . 121a i
Oeoteoon
AOwiiauig
Pension. orctit-5ftann§, ate., plant
LrnfMVyMDVnVmPnj^VMi
Other oeouctions (attach schedule)
¦ (j)
27
;2S
.'29
Totaloeducoons—Add Hnee 12 ttinwgn 26 *
Taiaoio income uehiie im oceraiing low ooducconanosoeci deductions (line l]Jo Soaciai doducadw (Schedule C. line 30) '2f>i (T)
130 TjjacieincBine—tine 26 lea ane 29c
31 Total MxiScheomeJ. Una 10)
32 fa;—teeiMiwiiiawiuMHOHBli&i
b 1989 eaumeced tax payments
c uss i989<*tonoaeeaeetore*Form4466 I 3ft H
e Ta* Jimaiaad wui Form 7QQ4
f Credit from rajuioaw aHoeuiWHlLUHMieoa (eaicn Form 2439) .
j ( Crao«forFedaratBontuo*we3Hnd33leieif—nanei2>tenninBMniow
39 Ovarvaywem—I'Una 32ft fckipi Umi Uia Mai of Unas 31 and 33. enaar amount ovareatf . .
36 e^awaaioftaaMweaeatCiedlfclliin I I II ' " -III'
Sifii
He»
Qae
"35T
~
PlM
frtaa
-------
blxAibit J-i
LOCATION OF FINANCIAL DATA ON 1989 FORM 1120
(continued)
HjuofSh—a
'H» 4
L/WMtliv
l<) I
1 C«n
2a T>joe notes ano accounts receivable
b Leu allowance for bad debts
3 inventories
US governmentoain»t»ofg
Tji-exemet securities (see instructions)
Other current assets (attach scneome)
Loans to stocknoMeo
Mortgage ana real eitate loans.
Other investments (ettacn schedule).
10a Buildings ana oWt oeorename assets
b Lass accumulated depreciation .
11a Oeowtawe
b Less accumulated deowtion
12 Und(netofanyamortaaaon) .
13a intangieie assets (amortaaneomy)
b less accumulated amortaaoon
14 Other assets (atlacn schedule).
H 'otai assets
16
17
II
19
20
21
22
23
24
23
28
27
Sr heduir^fl-1
UaWttiee am StotUiatdan' Marty
Accounts payaoie
Mortgages. nons. bonds onameo less man lyear|
Other current liabilities (attach scnaduie)
Loans from stocMwMers. .
Mortgages. notes, bonos oeyeoie m 1 year or r
Other HaMities (attach schedule).
CaMal stocn: a Preferred stocn .
b Common nock .
Paid-in or capital surplus.
ftaaeieawni Aupweaau<«
Retained eamtnp—Unappropnated.
Less cost at treasury stock
^ot|n»iB«iit>es ana stocktioWeri eouity.
Reconciliation o«litc—te per Boos With Income per Return (You are r
if the total assets on Mie IS. column B*Unce at end of war (hne 4 letsune 71
3-8
Sfpftntfrr IW
-------
Exhibit 3-2
NEW ABEL TAX DATA INPUTS: FORM 1120 AND 1120-A
Data Item
Location on Form 1120*
Location on Form 1120-A* j
1.
Gross Receipts or Sales
Less Returns and
Allowances
lc
lc
2.
Interest Expense
18
18
3.
Depreciation
20
20 |
4.
Depletion
22
NA., use 0 |
5.
Taxable Income
Before NOL and
Special Deductions
28
24
6.
NOL Deductions
29a
25a
7.
Special Deductions
29b
25b
8.
Total Tax
31
27 1
9.
Credit From Regulated
Investment Companies
1988-89: 32f
1984-87: 32e
1988-89: 28f ]
1984-87: 28e J
10.
Credit For Federal Tax on
Fuels
1988-89: 32g
1984-87: 32f
1988-89: 28g
1984-87: 28f
11.
Cash
L-l, Col.(d)
II-l, Col.(b) I
12
Trade Notes and Accounts
Rec. Less Allowance for
Bad Debts
1989: L-2b, Col.(d)
1984-88: L-2a, Col.(d)
1989: H:2a-2b, Col.(b) |
1984-88: II:2-2a, Col.(b)
13.
Inventories
L-3, Col.(d)
n-3, Col.(b)
14.
U.S. Government
Obligations
L-4, Col.(d)
IM, Col.(b)
„
Tax-Exempt Securities
1989: L-5, Col.(d)
1984-88: NA., use 0
1989: II-5, Col.(b)
1984-88: NA., use 0
16.
Other Current Assets
1989: L-6, Col.(d)
1984-88: L-5, Col.(d)
1989: II-6, Col.(b)
1984-88: Q-5, Col.(b)
17.
Accounts Payable
1989: L-16, Col.(d)
1984-88: L-15, Col.(d)
1989: n-13, Col.(b) 1
1984-88: 11-12, Col.(b)
18.
Mortgages, Notes, Bonds
Payable in Less Than One
Year
1989: L-l7, Col.(d)
1984-88: L-16, Col. (d)
NA., use 0
3-9
September 1991
-------
Data Item
Locattoa oa Form 1126*
Location oa Form 1120-A* |
19.
Other Current Liabilities
1989: L-18, Col.(d)
1984-88: L-17, CoL(d)
1989: n-14, Col.(b)
1984-88: II-13, CoL(b)
20.
Loans From Stockholders
1989: L-19, Col.(d)
1984-88: L-18. Col.(d)
1989: n-15, Col.(b)
1984-88: 11-14, Col.(b)
21.
Mortgages, Notes, Bonds
Payable in One Year or
More
1989: L-20. Col.(d)
1984-88: L-19. Col.(d)
1989: 11-16, CoL(b)
1984-88: 11-15, Col.(b)
22.
Other Liabilities
1989: L-21. CoL(d)
1984-88: L-20. CoL(d)
1989: n-17, CoL(b)
1984-88: 11-16, CoL(b)
23.
Appropriated Retained
Earninp
1989: L-24, Col.(d)
1984-88: L-23, CoL(d)
NA., use 0
24.
Unappropriated
Retained Earnings
1989: L-25, CoL(d)
1984-88: L-24, Col.(d)
1989: H-20, CoL(b)
1984-88: 0-19, CoL(b)
23.
Total Liability and
Stockholder's Equity
1989: L-27, CoL(d)
1984-88: L-26, CoL(d)
1989: 11-22, CoL(b)
1984-88: 11-21, CoL(b)
26.
Income Recorded
on Books not
Included in Return
M-l:7
III-5
Locations all refer to the 1984*1969 Tax Forms unless indicated otherwise. The locations are
interpreted as follows, using four examples:
1. "18" indicates line 1&
2. *L-1, CoL(d)," indicates line 1 of Schedule L, column (d). All numbers from
Schedule L should be taken from column (d).
3. H-l, CoL(bX" indicates line 1 of Part II, column (b).
4. "1988-89: 32f and "1984-87: 32e" indicates line 32f for years 1988 and 1989's tax
returns and line 32e for years' 1984 through 1987's tax returns.
3-10
-------
To simplify the data entry process, it is suggested that novice users utilize the Data Entry
Forms contained in Appendix A. These forms organize all needed information in the order of
ABEL's requests. Specifically, the Data Entry Forms:
o Organize the required input data by year;
o Expedite Phase I data entry; and
o Simplify consistency checks between all Phase I and Phase II units of measure
(dollars, thousands of dollars, or millions of dollars).
To facilitate future ABEL analyses, we suggest that you photocopy the Data Entry Forms so that you
will have a sufficient supply when the need arises. Exhibit 3-3 displays the Data Entry Form that you
should use with the 1989 Form 1120. All of the Data Entry Forms are contained in Appendix A.
Note that the Data Entry Forms vary for different years, reflecting differences in the tax forms from
year to year.
Prior to entering each year of data, ABEL will ask how you plan to enter your data. You
have the choice of using the appropriate Data Entry Form or entering the data directly from Form
1120 or Form 1120-A.4
Which form are you using for year 1989?
1) ABEL Data Entry Form 2) Form 1120 3) Form 1120A
2
You can use different forms in the same ABEL session. For example, a firm may have filed Form
1120-A in 1987 and 1988 but filed Form 1120 in 1989.
4 Certain items contained on Form 1120 are not applicable when using Form 1120-A. For
example, depletion is not included on Form 1120-A. ABEL is constructed so that it does not ask you
to input values for items that are not applicable.
3-11
September 1991
-------
Exhibit 3-3
ABEL DATA ENTRY FORM: 1989 AND 1990 FORM 1120
Fill in dau year.
1 DATA ENTRY FORM FOR 1989 AND 1990 TAX FORM 1120 |
I 1. Cross Receipts or Sales Less Returns and Allowances (Line lc) D
2. Interest Expense (Line 18)
3. Depreciation (Line 20)
4. Depletion (Line 22)
5. Taxable Income Before NOL and Special Deductions (Line 28) 1
6. NOL Deductions (Line 29a) I
| 7. Special Deductions (Line 29b) 1
| 8. Tout Tax (Line 31) |
1 9. Credit from Regulated Investment Companies (Line 320
.0. Credit for Federal Tax on Fuels (Line 32g)
11. Cash (Schedule L, Line 1) |
12. Trade Notes and Accounts Receivable Less Allowance for Bad Debts (Schedule L, Line I
13. Inventories (Schedule L, Line 3) 1
14. U.S. Government Obligations (Schedule L, Line 4) 1
15. Tax-Exempt Securities (Schedule L, Line S)
16. Other Current Assets (Schedule L, Line 6)
Accounts Payable (Schedule L, Line 16)
18. Mortgages, Notes, Bonds Payable in Less Than One Year (Schedule L, Line 17)
19. Other Current liabilities (Schedule L, Line 18)
20. Loans from Stockholders (Schedule L, Line 19)
21. Mortgages, Notes, Bonds Payable in One Year or More (Schedule L, Line 20)
22. Other Liabilities (Schedule L, Line 21) |
23. Appropriated Retained Earnings (Schedule L, Line 24) I
24. Unappropriated Retained Earnings (Schedule L, Line 25)
25. Total Liability and Stockholders' Equity (Schedule L, Line 27)
' 26. Income Recorded on Books not Included in Return (Schedule M-l, Line 7)
Note All Form 1120, Schedule L, entries should be taken from column (d), the right-most column.
3-12 September 1991
-------
If you decide to enter your data directly from either Form 1120 or Form 1120-A. ABEL will
identify the line and location of the data on that year's form as illustrated below:
1. Please enter Gross Receipts or Sales Less Returns & Allowances
(in Thousands)
From Line lc. Form 1120:
6800
If you decide to use the Data Entry Forms to enter Phase I tax return data, ABEL will ask
you for the input item (e.g.. Interest Expense) whose number matches the line number on the Data
Entry Form. In other words, the line prompts for the tax forms are not provided.
2. Please enter Interest Expense
(in Thousands)
100
4. Phase I Data Verification Checks
As you enter Phase I tax return data, ABEL conducts two checks to ensure data reliability.
The Grst check assures that data are sensible relative to other values that have been entered, while
the second check confirms that the data fall within an allowable range of values. If a data input fails
a check, ABEL will explain the problem and ask you to re-enter the correct value. Once you have
entered an acceptable value, ABEL will allow you to proceed to the next input value.
3-13
September 1991
-------
The Phase I data checks consist of the following:
o There must be one to five years of tax return data. If this is not the case.
ABEL will print the following message:
3. Please Enter the Number of Years of Data Available
6
ERROR: THE NUMBER OF YEARS OF TAX RETURN DATA MUST BE A NUMBER
FROM 1 TO 5. PLEASE ENTER AGAIN.
3. Please Enter the Number of Yean of Data Available
(Current Value « 6, press ENTER to retain it)
5
l_—
o ' ABEL will not accept tax data from before 1984; only tax returns covering
fiscal years 1984 or later are acceptable. If this condition does not hold,
ABEL will respond:
4. Please Enter the Most Recent Year
1979
ERROR: ALL TAX RETURN DATA MUST BE 1984 OR LATER. THE MODEL WILL
NOT ACCEPT ANY TAX DATA BEFORE 1984.
4. Please Enter the Most Recent Year
1989
3-14
September 1991
-------
o If your input is not a number or a B, V. H. S. or Q, ABEL will respond:
1. Please enter Gross Receipts or Sales Less Returns & Allowances
(in Thousands)
D
ERROR: AN ILLEGAL CHARACTER EXISTS IN THE ABOVE ENTRY. PLEASE
ENTER AGAIN.
1. Please enter Gross Receipts or Sales Less Returns & Allowances
(in Thousands)
6800
Except for (5) Taxable Income before N.O.L. deductions, (8) Total Tax, and
(23) Appropriated and (24) Unappropriated Retained Earnings, your Phase I
tax return inputs cannot be negative values. If you enter a negative value for
an input other than the four listed above, ABEL will respond:
1. Please enter Gross Receipts or Sales Less Returns & Allowances
(in Thousands)
.500
ERROR: THIS INPUT CANNOT BE A NEGATIVE NUMBER. PLEASE CHECK
YOUR TAX DATA AND ENTER AGAIN.
I 1. Please enter Gross Receipts or Sales Less Returns & Allowances
I (in Thousands)
I (Current Value - -500.00, press ENTER to retain)
Ll
B. REQUIRED FINANCIAL DATA - PHASE II
ABEL will proceed with Phase II if you have supplied three to five years of tax data. In
order to perform the Phase II calculations, ABEL needs data on the timing and amount of the
environmental expenditure or penalty you wish to evaluate.
3-15
September 1991
-------
1.
Penalty. Pollution Control Expenditures, and Clcan-L'p Costs
a. Pollution Control Investment Date/Penalty Payment Date
As illustrated below, ABEL asks for the dates that environmental expenditures or penalties
are to be paid You must enter all four digits for the appropriate year. In other words, enter 1991,
not 91.
ABEL is now ready to proceed with the Phase II analysis.
Please make sure to input all of your Phase II data in
Thousands.
1. Enter the year in which the company will be investing in pollution
control equipment and/or paying a penalty (e.g., 1991).
1991
ABEL assumes that the year of the environmental expenditure is the same as the year in which the
firm pays the lump-sum penalty, if both are applicable.
b. Proposed Lamp-Sum Settlement Penalty
ABEL then asks you for the proposed amount of the lump-sum penalty. Make sure to enter
this value in the same units as your Phase I inputs. If this figure is unavailable, or if you are simply
interested in bow much money the firm can generate over the next five years, enter a zero and
continue with the program.
3-16
September 1991
-------
2. Enter *\e proposed lump-sum settlement penalty in Thousands.
If there is no proposed penalty, enter a zero.
100
c Depreciable Capital Cost of New Investment
If the firm will be required to make an investment in pollution control equipment, the initial
capital cost of that investment and the yer.r-dollars in which it is expressed should be entered.
Depreciable expenditures usually apply to tangible items that wear out over a number of yean, such
as a groundwater monitoring system or an air pollution control device. If compliance will occur in
the future, this value may be the same value you entered in BEN.S The depreciable capital cost
should include the purchase cost of the equipment as well as the installation costs. This value should
not include non-depreciable costs associated with the new investment, such as the purchase of land.
3. Enter the depreciable capital cost of pollution control investment in
Thousands followed by year-dollars separated by a blank space (e.g.,
60000 1989). The cost of land should not be included in this figure.
Enter zero if this cost category is not applicable.
500 1987
If the depreciable capital cost value is an estimate of the current costs of installing new
equipment, the estimate is probably in this year's dollars. If an estimate was made in an earlier year,
consult the source of this estimate to determine when it was made. If none of the firm's pollution
control investment costs are for depreciable items, enter a zero.
5 Past expenditures on pollution control equipment should not be entered here, only current
and future expenditures because past expenditures are already reflected in the firm's tax return
data.
September 1991
3-17
-------
d.
Non-Depreciable. Non-Tax-Deductible One-Time Costs
Any costs associated with a new pollution control investment that are not depreciable, and
cannot be deducted for tax purposes, should be entered here. One common non-depreciable cost
is the purchase of land. For example, the violator may have to purchase land as a site for a treatment
facility. The format of this entty is the same as the previous cost entries. Enter a zero if this cost
category is not applicable.
4. Enter the non-depreciable, non-tax-deductible capita] costs associated with
the new investment in Thousands (e.g., the cost of land) followed by
year dollars separated by a blank space (e.g., 15000 1990). Enter a zero if
this coat category is not applicable.
200 1989
e. Non-Depreciable but Tax-Deductible One-Time Costs
Costs that are not depreciable but may be deducted from taxable income should be entered
here. This category includes one-time costs such as funding a site cleanup, establishing a
recordkeeping system, or training employees. The format of this entry is the same as the previous
cost entries. Enter a zero if this category is not applicable.
5. Enter the non-depreciable but tax-deductible capital costs associated with
the new investment in Thousands (e.g., site clean-up compliance costs)
followed by year-dollars separated by a blank space (e.g., 30000 1989). Enter
zero if this cost categoiy is not applicable.
700 1990
3-18
September 1991
-------
f. Annual Costs
Enter any annual, recurring costs associated with operating and maintaining the required
pollution control equipment or monitoring a site. Also, include the year-dollars in which the costs
are expressed. The format of this entry is the same as previous cost entries.
6. Enter the annual costs of the pollution control activity in Thousands
(e.g„ operating and maintenance costs) followed by year-dollars separated
by a blank space (e.g^, 30000 1989). Enter zero if there are no annual
costs.
30 1990
The figure entered in this category should reflect the average annual incremental costs associated
with operating and/or maintaining the required environmental equipment. These costs include any
changes in the costs of labor, power, water, raw materials and supplies, recurring training of
employees, insurance premiums and any change in annual property taxes.
The value of operating and maintenance (O&M) credits should also be considered in
estimating the annual incremental costs. O&M credits may represent actual O&M cost savings such
as heat recovery, product or byproduct recovery, and so forth. For example, the installation of new
pollution control equipment may reduce certain costs (such as sludge disposal) that were associated
with operations during the period of noncompliance. If the resulting incremental O&M cost is
negative (i.e., there is a net cost savings from the new pollution control equipment), the negative
figure may be used in ABEL.
The annual costs should also reflect any annual lease payments for pollution control
equipment. However, the annual costs should not include annualized capital recovery, interest
payments, or depreciation. If there are not any annual costs, enter a zero.
3-19
September 1991
-------
2.
Reviewing Phase II Inputs
After you have entered your Phase II inputs, ABEL gives you the option of reviewing and
modifying the inputs:
Would you like to review your penalty & pollution control cost inputs?
(Y=yes, N»No)
Y
You have entered the following Phase II data (in Thousands):
Value
Year-dollars
1. Investment or penalty payment year
1991
2. Lump-sum settlement penalty
100.
1991
3. Depreciable capital cost
500.
1987
4. Non-depreciable, non-tax-deductible capital costs
200.
1989
5. Non-depreciable, tax-deductible one time costs
700.
1990
6. Annual costs
30.
1990
Enter the number of the item whose value you want to change, or type G to Go on with
Phase II analysis. For example, to change the value for the Investment Year, type 1.
G
As illustrated in the example above, if you indicate that you would like to review the inputs, the
ABEL model displays the current value for each of the six inputs. At this point, you can enter the
number corresponding to the data item you would like to change or you can enter a G to proceed
with the Phase U analysis.
3. \artobtes With Standard Values
ABEL gives you the opportunity to review and modify five assumptions, or "standard values,"
that are used in the Phase II analysis. ABEL's standard values are updated yearly to reflect changes
in interest rates, tax law, and so forth, although the method for calculating the value remains the
same. You should not alter standard values unless you have a complete understanding of why they
do not apply to your specific case.
3-20
Sepfrinfrer 1991
-------
ABEL uses the following standard values in Phase II:
1. Reinvestment Rate = .0
2. Marginal Income Tax Rate (%) = 38.5
3. Annual Inflation Rate (%) = 4.4
4. Discount Rate (%) = 12.1
5. Weighted Average Smoothing Constant = .3
Do you wish to have any of these items explained? (Y=Yes, N«No)
N
Do you wish to change any of these items? (Y=Yes, N=No)
Y
a. Reinvestment Rate
The reinvestment rate determines the portion of a firm's future cash flow that is allocated for
reinvestment in depreciating assets. Typically, firms reinvest a portion of their earnings to replace
machinery and equipment as it wears out. However, the more a firm reinvests, the less cash it will
have available for payment of environmental expenditures.
The reinvestment rate variable determines the fraction of the firm's depreciation expense that
you assume the Arm will reinvest. ABEL uses a standard value of 0.00 for the reinvestment rate,
meaning that no funds are allocated to reinvestment. This standard value is based on the assumption
that a Arm required to pay environmental expenditures should not be constrained from meeting those
obligations by the need to replace machinery and equipment. Because ABEL forecasts only five years
into the future, the Arm is not permanently prevented from replacing such assets. In addition, a Gve-
year period of reduced investment should not jeopardize the long-run solvency of most firms.
If you wish to explore a Arm's ability to finance penalties or new investments under varying
reinvsjtment scenarios, you may select a reinvestment rate that is greater than 0.00. If you enter a
value greater than 0.00 and less than 1.0, you are allowing for partial replacement of the depreciated
I
3-21
September 1991
-------
portion of the firm's existing assets. If you enter a value of 1.0. the ABEL calculation will assume
full replacement of the depreciated portion of the existing assets, taking inflation into account. A
value in excess of 1.0 allows for new capital expenditures.
As illustrated below. ABEL will ask you to enter the line number of the value you would like
to change. Enter 1 to change the reinvestment rate, and then enter the new value when ABEL
prompts you to do so.
Enter the number of the item you wish to have changed
(e.g. 1 for Reinvestment Rate).
1
1. Reinvestment Rate » .0
Please enter the new value.
L
b. Marginal Ibwbk Tbs BbK
The marginal income tax rate is the tax rate applied to the last dollar of income earned by
a firm. This rate reflects the percentage of income paid for taxes if taxable income were to increase
or decrease, and includes both state and federal taxes. The average tax rate is the total tax divided
by the total taxable income. It is important to use the marginal tax rate because it is the rate which
applies to incremental change; in the firm's tax-deductible expenses and income. This tax rate is used
to derive the firm's after-tax cash flow.
The marginal tax rate does not include sales tax, inventory tax, charter tax, or taxes on
property. One time tax payments, such as sales taxes on the purchase of equipment, should be
included as an investment cor t. If one or more of these taxes are paid regularly, then they should
be included as an annual cost.
3-22
S$Bl£m6sLl&l
-------
The standard value for ihis variable is 38.5 percent. The value is based on the marginal
federal tax rate at the highest income level (3 percent) and the average of all marginal corporate
tax rates imposed by states. This variable reflects the fact that state taxes are deductible from federal
income taxes.
The total corporate marginal tax rates are calculated state-by-state in Exhibit 3-4.6 If you
wish, you can replace the standard value with the value for the state in which the firm files its federal
taxes. Be sure to enter the marginal income tax rate in percentage terms (e.g., enter 39.2 for 39.2
percent).
Enter the number of the item you wish to have changed
(e.g. 1 for Reinvestment Rate).
2
2. Marginal Income Tax Rate (%)
Please enter the new value.
403
3&5
6 The adjustment is made by multiplying the state rates by a factor equal to one minus the
marginal federal tax rate, as shown in the following formula:
MTRtOTAL — MTRpEDERAL + [M I SSTATE * (1 * N^TRfederal)]
where: MTRppug^ = the marginal tax rate at the federal level; and
MTR5i-atc = the marginal tax rate at the state level
Therefore, if you were to calculate the total marginal tax rate based on a marginal state tax rate of
10%, the result would be 40.6 percent This calculation is shown below:
M^Wl = 34 + [.10 • (1 - .34)]
= .34 + (.10 • .66)
- .34 + .066
= .406
= 40.6%
3-23
September 1991
-------
Exhibit 3-4
TOTAL CORPORATE MARGINAL TAX
RATES BY STATE
(Percent)
Alabama
VM
Alaska
40.2
Arizona
40.9
Arkansas
38.0
California
40.1
Colorado
37.6
9 Connecticut
43.1 |
U Delaware
39.7 |
r—
Florida
37.6
Georeia
38.0
Hawaii
38.2
Idaho
39.3
Illinois
38.8
Indiana
39.2
Iowa
41.9
Kansas
37.0
Kentucky
38.8
Louisiana
39.3 1
Maine
39.9 I
Maryland
38.6 |
Massachusetts
40.3
Michisan
34.0
Minnesota
40.3
Mississippi
37.3
Missouri
38.3
Montana
38.5
3-24
September 1991
-------
Exhibit 3-4
TOTAL CORPORATE MARGINAL TAX
RATES BY STATE
(Percent)
(continued)
Mnrolnnl f < R«t*«
Nebraska
38.4
Nevada
34.0
New Hampshire
39.3
| New Jersey
39.9
1 New Mexico
39.0
New York
39.9
North Carolina
38.6
North Dakota
40.9
Ohio
39.9
Oklahoma
37.3
Oregon
38.4
Pennsylvania
39.6
Rhode Island
39.9
South Carolina
37.3
South Dakota
34.0
Tennessee
38.0
Texas
34.0
Utah
37.3
Vermont
39.4
Vireinia
38.0
Washineton
34.0
West Vireinia
40.2
Wisconsin
39 2 I
Wyoming
34.0 1
Source: The Book of the States. 1990-1991 edition. Based on a marginal Federal tax rate of
34 percent and State marginal corporate tax rates for 1990.
3-25
September 1991
-------
C. Aannal Inflation Rate
ABEL uses the annual inflation rate to convert a firm's historic Financial data into equivalent
inflation-adjusted, future-year dollars. The standard value ABEL uses is based on the U.S. Gran
National Product (GNP) price deflator.7 Exhibit 3-5 provides the raw U.S. GNP implicit price
deflators and their year-to-year percentage changes. ABEL's standard value for the ten year period
ending in 1990 is 4.4 percent.* You should not change this value without a good reason. The box
below illustrates how to change the stat lard value.
Enter the number of the item you wish to have changed
(e.g. 1 Cor Reinvestment Rate).
3
3. Inflation Rate (%) = 4.4
Please enter the new value.
3.4
7 This measure of inflation is more generalized than that used in BEN. Specifically, BEN uses
Chemical Engineering's "Plant Cost Index" (PCI) because it accurately reflects the costs of activities
associated with pollution control expenditures. Unlike BEN, the majority of cash flows that ABEL
inflates correspond to the firm as a whole. Thus, the inflation rate used in ABEL is tied to the
economy-wide inflation rate, not just the inflation rate for capital equipment
'In general, an annual inflation rate is calculated as follows:
To obtain the standard value, index values for 1990 and 1980 (131.5 and 85.7, respectively) were
used to calculate the ten-year average. The calculation is:
Where: N = Final year - Initial year
- (1.044 - 1) MOO
= 4.4 percent
3-26
September 1991
-------
Exhibit 3-5
U.S. HISTORIC INFLATION RATE
Year
Implicit Price Deflator
Using U.S. GNP (1982 » 100)
Year to Year Change |
1968
37.7
NA [
1969
39.8
5.6% 1
8 1970
42.0
5.5% I
1971
44.4
5.7% I
1972
46.5
4.7%
1973
49.5
6.5%
1974
54.0
9.1%
1975
59.3
9.8%
1976
63.1
6.4%
1977
67.3
6.7%
1978
72.2
7.3%
1979
78.6
8.9%
1980
85.7
9.0%
1981
94.0
9.7%
1982
100.0
6.4%
1983
103.9
3.9%
1984
107.7
3.7%
1985
110.9
3.0%
1986
113.8
2.6%
1987
117.4
3.2%
I 1988
121.3
33%
j 1989
126.3
4.1%
| 1990
131.5
4.1%
Source: Economic Report of the President, February, 1991.
3-27
September 1991
-------
& Ptoconat Rata
ABEL uses the discount rate to express the firm's expected future cash flows in present value
terms.9 ABEL uses a standard discount rate value of 12.1 percent. This value represents an
estimate of the weighted-average-cost-of capital (WACC) over the past ten years ending in 1990, for
an average firm. The formula used to calculate the WACC for each year is:
WACC - [[Ca4«(1.0-7*)]*Wre] ~ [[!»~*]• WM]
where:
CBA 3 Ten-Year Average return on Corporate Bond
TR ¦ Marginal Corporate Tax Rate
WD *¦ Fraction of total financing made up of debt
TB » Ten-Year Average return on Treasury Bonds
R ~ Equity risk premia
WE =» Fraction of total financing made up of equity
Exhibit 3-6 displays the key aspects of the WACC calculation. This standard value will be modified
annually. You should not change this variable unless you consult with a financial analyst The box
below illustrates how to change the standard value.
Biter the number of the item you wish to have changed
(e.g. 1 for Reinvestment Rate).
4
4. Dtacourt Rate («) » 111
Please enter tfeenew value.
5
' The concept of discounting is discussed in the BEN User's Manual. July 1990. The essential
aspect of thu concept is that a dollar which you receive today is worth more than a dollar that you
receive a year from now. For example, you could take a dollar that you receive today and put it in
the bank. In one year, the value of this dollar will have increased as a result of interest earned.
3-28
September 1991
-------
ABEL uses the WACC because the model discounts the firm's overall cash flows, rather than
those associated with a particular project. The WACC is appropriate since it is the standard discount
rate used to evaluate a firm's overall cash flow.'0
e.
Weighted Average Smoothing Constant
The weighted average smoothing constant (WASC) is used to weight the financial data when
producing an estimate of future cash flow. The standard value WASC used by ABEL is 0.3. You
should not change this value unless advised to do so by the ABEL program during the Phase II
10 Like the inflation rate, the discount rate used in ABEL is different from that used in BEN.
This difference results from finance theory which dictates that the discount rate should reflect the
risk of cash flows being analyzed. BEN is concerned with discounting the cash flows resulting from
a 11)0% equity financed pollution control investment. Thus, the equity cost of capital is the
appropriate discount rate for that model's cash flows. ABEL evaluates all cash flows of a firm,
therefore, the weighted-average-cost-of-capital is appropriate.
analysis.
Enter the number of the item you wish to have changed
(e.g. 1 for Reinvestment Rate).
5. Weighted Average Smoothing Constant
Please enter the new value.
3-29
September 1991
-------
WEIGHTED AVERAGE COST OP CAPITAL CALCULATIONS
YEAR
CORPORATE
BOND
AVERAGE'
TAX
RATE1
AT
DEBT
COST
FRACTION
OF
DEBT'
TEN
YEAR
T BOND4
RISK
PR EM LA5
EQUITY
COST*
FRACTION
OF
EQUITY'
WACC |
1981
15.06
0.496
7.59
0.51
13.91
7.1
21.01
0.49
14.17
1982
14.94
0.496
7.53
0.53
13.00
7.1
20.10
0.47
13.44
1983
12.78
0.496
6.44
0.48
11.10
7.1
18.20
0.52
12.56
1984
13.49
0.496
6.80
0.50
12.44
7.1
19.54
0.50
13.17
1983
12D5
0.496
6.07
0.50
10.62
7.1
17.72
0.50
11.90
1986
9.71
0.496
4.89
0.43
7.67
7.1
14.77
0.57
10.52
1987
9.91
0J84
6.10
0.39
8.39
7.1
15.49
0.61
11 83
1988
10.18
0J84
6.27
0.47
8.85
7.1
15.95
0.53
11.40
1989
9.66
0.384
5.95
0.44
8.49
7.1
15.59
0.56
11.35
1990
9.77
0385
6.01
0.47
8.55
7.1
15.65
0.53
11.12
10 YEAR
AVERAGE
11.76
6.37
10.30
17.40
12.14
1 This is the average interest rate paid on corporate bonds. Moody's Bond Record. January 1981 - January 1989, and Table 1.35. Federal Reserve Bulletin.
March 1991.
1 For further explanation of bow the average total corporate marginal tax rate is calculated, see pages 111-23 to III-25 in the BEN User's Manual.
' These weights represent the fraction of financing that is made up of debt or equity. The weights are constructed using data from Standard and Poor's
Siock Analyst's Handbook. The equity indexes are adjusted to reflect their market value.
* Treasury bond data from Table 1.35, Federal Reserve Bulletin. March 1991 and earlier issues.
' This is the arithmetic mean of the long-term equity risk premium for 1926-1990 calculated by lbbotson Associates.
* For further explanation of the calculation of equity cost of capital, see page III-30 of the BEN User's Manual.
lOOl
-------
Exhibit 3-7 displays the weights for three, four and five years of data, using a weighted
average smoothing constant of 0.3. As this exhibit shows, when using three years of data, the relative
contributions to the Grin's projected cash flow are 46 percent for the most recent year, 32 percent
for the second year, and 22 percent for the third year. If you change ihe constant to a value greater
than 0.3, increased emphasis will be placed on the more recent data.
Exhibit 3-7
WEIGHTS ASSIGNED TO EACH YEAR OF DATA
WHEN THE WEIGHTED-AVERAGE SMOOTHING CONSTANT EQUALS 0-J
Year
(1 - most meat)
Weights for
3 Years of Data
Weights for
4 Years of Data
Weights for
5 Years of Data
1
0.46
039
036
2
032
0.28
0.25
3
0.22
0.19
0.18
4
-
0.14
0.12
5
--
-
0.09
4. Effect of Changes to Standard Value Variables
Exhibit 3-8 summarizes each standard value used in the Phase II analysis, as of June 1991.
As previously noted, the standard values for the marginal income tax rate, annual inflation rate, and
discount rate will be revised annually. The reinvestment rate and the weighted average smoothing
constant, however, will not be changed.
3-31
September 1991
-------
Exhibit 3-8
PHASE II
STANDARD VALUE INPUT VARIABI.ES
(June 1991)
Variable
Value
Reinvestment Rate
0.00
Marginal Income Tax Rate
38.5%
Annual Inflation Rate
4.4%
Discount Rate
12.1%
Weighted Average Smoothing Constant
0.3
Exhibit 3-9 summarizes how changing standard values affects the ability to pay analysis. The
effect noted for each variable indicates the direction in which ABEL's results would change, if the
values of all other variables were held constant.
3-32
-------
Exhibit 3-9
IMPACT OF CHANGES OF VARIABLE STANDARD VALUES
(Holding All Other Variables Constant)
| Variable
Direction of
Change
Impact on Ability to Pay |
Reinvestment Rate
Increase
Decrease levels of affordable |
penalties and investments |
Marginal Tax Rate
Increase
Increase levels of affordable
investments and penalties
(provided tax deductible
expenditures are required)
1 Inflation Rate
Increase
Increase levels of affordable
investments and penalties*
I Nominal Discount Rate
Increase
Decrease levels of affordable 1
investments and penalties |
1 Weighted Average Smoothing Constant
Increase
Indeterminate** j
Note: If the firm's future projected pre-tax cash flow is less than zero, the direction of the change
will be opposite of what is stated above.
* The impact of changes in the inflation rate may vary from one specific case to another,
depending on the relative values of the other variables. Overall, however, an increase in the
inflation rate will result in increased net cash flows.
** The effect of the weighted average smoothing constant on ability to pay depeuds on specific
pre-tax cash flow and income figures.
3-33
September 1991
-------
5.
Phase II Data Verification Checks
As with the Phase I inputs, ABEL checks the Phase II values to ensure they are in the correct
format and to test for invalid relationships among variables. For each input, an acceptable value must
be entered before ABEL will allow you to proceed with the next input value.
Criteria for Phase II data are as follows:
o Every input must be either a number or a B. H. or Q.
o All Phase II inputs, with the exception of the annual costs, must be greater
than or equal to zero. If an input's value does not meet this condition, ABEL
will state the following:
i
2. Enter the proposed lump-sum settlement penalty in Thousands.
If there is do proposed penalty, enter a zero.
•100
ERROR: THIS INPUT CANNOT BE A NEGATIVE NUMBER. PLE.\SE ENTER
AGAIN.
2. Eater the proposed lump-sum settlement penalty in Thousands.
If there is no proposed penalty, enter a zero.
o The weighted average smoothing constant must be greater than (but not equal
to) zero and less than 1.0. If this criterion is not met, the weights which
ABEL uses will be nonsensical. To prevent this situation from occurring,
ABEL will ask you to enter an acceptable smoothing constant by stating:
5. Weighted Average Smoothing Constant =» .3
Please eater the new value.
12
ERROR: THE SMOOTHING CONSTANT MUST BE BETWEEN ZERO AND ONE.
PLEASE ENTER AGAIN.
5. Weif' ted Average Smoothing Constant 3 1.2
Please enter the new value.
3-34
September 1991
-------
o Hie discount rate must always be greater than the inflation rate. If this
condition is not satisfied, it implies an unrealistic situation where real (i.e..
excluding inflation) interest rates are less than zero. If the discount rate does
not satisfy this condition, ABEL will state:
4. Discount Rate (%) = 12.1
Please enter the new value.
3.0
ERROR: THE DISCOUNT RATE MUST ALWAYS BE GREATER THAN THE
INFLATION RATE. PLEASE ENTER AGAIN.
4. Discount Rate (%) = 3.0
Please enter the new value.
The marginal income tax rate must be greater than or equal to zero and less
than 100 percent. If this condition does not hold, ABEL will state:
2. Marginal Income Tax Rate (%) = 38.5
Please enter the new value.
101
ERROR: THE MARGINAL TAX RATE MUST BE BETWEEN ZERO AND ONE
HUNDRED PERCENT. PLEASE ENTER AGAIN.
2. Marginal Income Tax Rate (%) = 101.0
Please enter the new value.
3-35
. eptember 1991
-------
INTERPRETING ABEL RESULTS
CHAPTER 4
After you have collected and entered your inputs. ABEL will provide an evaluation of the
firm's ability to pay an environmental expenditure and/or a civil penalty. This chapter describes how
to interpret ABEL results for both Phase I and Phase II.
A. PHASE I ABEL ANALYSIS
I. Background
Phase I of ABEL generates five financial ratios for each year of tax return data. Financial
ratios are commonly used by analysts to evaluate a firm's viability and its financial structure. ABEL
indicates whether the firm's ratios are better or worse than target (or threshold) values for each year,
and briefly summarizes the implications of ratios' values.1 ABEL also provides an overall assessment
that incorporates all of the firm's ratio results for the most recent year of tax return data.
1 ABEL's target values come from a variety of sources and were chosen because they are generic,
non-industry-specific standards that are commonly applied. One of the sources used is Financial Tests
as an Option for Demonstrating Financial Responsibility. Volume II: Text, by International Research
and Technology Corporation, November 25, 1980. More sophisticated users may want to compare
the ratio results to those specifically calculated for the firm's industry or evaluate ratio results over
time. This information may be found, for example, in Dun and Bradstreet industry summary financial
data.
4-1
-------
If all of the firm's ratios are strong relative 10 the target values and Jo not show significantly
deteriorating trends, the firm is most likely currently in good financial health. If only some of the
ratios show acceptable values however, the firm's situation may be more uncertain. Poor rctios do
not necessarily indicate that a firm will be unable to pay proposed environmental expenditures. The
Phase I ratio analysis should always be used in conjunction with the conclusions drawn from the
Phase II analysis.
The five key financial health indicators calculated by ABEL are: (1) the debt to equity ratio,
(2) the current ratio, (3) the times interest earned ratio, (4) Beaver's ratio, and (5) Altman's Z-Score.
The interpretation of each of these ratios is shown below and the method for calculating each ratio
is presented in Appendix B. For Phase I, ABEL provides the following outputs:
1. A summary table of the five ratios for each year of tax return data.
2. An explanation of the individual ratios, including a comparison of the firm's
ratios with the ABEL target values.
3. A comparison of the most recent year's financial ratios with the firm's average
historic ratios. ABEL will alert you when, for a specific ratio, the most recent
year's value is significantly better or significantly worse than the historical
average. ABEL will not perform this test unless you supply at least three
years of data.
4. An overall conclusion regarding the firm's financial condition based on ratios
from the most recent year.
Each type of output is described in detail below.
4-2
September 1991
-------
2. Sample On tout
Once you have entered all of the tax data, ABEL will produce the following statement:
ABEL is ready to begin Phase I output.
Please enter a carriage return to continue.
a. Sunimarr Table of Historical Financial Ratios
After entering a carnage return, ABEL will provide a summary table showing the firm's ratio
results. A sample summary table is provided below.
4-3
September 1991
-------
Firm's Name: XYZ Corporation Date: February 23, 1991
HISTORICAL FINANCIAL RATIOS
1988
1987
1986
198$
1984
Debt to Equity
2.00
1.60
1.00
0.90
0.80
Current Ratio
0.90
1.80
2.00
2.20
2.02
Times Int. Earned
1.20
*•••*
1.90
230
2.10
Beaver's Ratio
0.07
0.10
0.19
0.21
0.23
A>*xnan Z'-Score
1.14
120
2.30
3.00
3.15
Note: " ••••" means that ABEL could not compute a value.
Refer to the detailed ratio presentation for an explanation.
Do you wish to see a detailed explanation of these ratios?
(Y « Yes; N m No, fo directly to Phase I conclusions)
Please enter choice:
Y
The most recent year's data will always be in the left-most column. If you have provided
fewer than five years of data, the table will only display the relevant number of data columns, rather
than the five shown in the above example.
In certain circumstances, ABEL will show a value of The value of "•••••" appears
when ABEL is not able to calculate that financial ratio for mathematical reasons, such as trying to
divide by zero. In some instances, "•••••" is an indication of poor financial health, such as a firm
having zero assets. In other instances, it may be a sign of strong financial condition. For example,
the Tune* Interest Earned ratio would show "•****" when a firm has no interest expense. In each
of these cases, ABEL's detailed financial ratio explanation will also show a "*****".
4-4
September 1991
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b.
Detailed Explanation of Financial Ratios
You can receive a more detailed explanation of the financial ratios by responding Y at the
appropriate prompt. If you select N, ABEL will print a summary of the Phase I conclusions. Thii
summary is described later in the chapter. The following box illustrates the detailed output for the
first ratio, the Debt to Equity ratio.
1988 1987 1986 1985 1984
Debt to Equity 2.0 1.6 1.0 0.9 0.8
The debt to equity ratio (D/E) is defined as the firm's
total liabilities divided by its stockholders' equity.
This ratio measures the degree to which debt constitutes
the company's financing.
A D/E less than 1.5 but greater than or equal to zero generally
indicates that a firm has additional debt capacity. This firm's
D/E fell into this category in 1986, 1985, 1984.
A D/E greater than 1.5 generally indicates that a firm may have
difficulty borrowing additional capital The firm's
D/E fell into this category in 1988, 1987
Enter a carriage return to continue with individual ratio analysis.
Slight variations in the above screen can occur as a result of the firm's financial condition.
For example, if the firm's D/E ratio is below 1.5 for all years, the third paragraph indicating the yean
that the firm may have difficulty borrowing additional capital will not appear. Similarly, if the D/E
ratio is above 1.5 for all years, the second paragraph indicating the years that the firm has additional
debt capacity will not appear. Similar variations will occur in the explanations of the other ratios.
4-5
September 1991
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The following boxes illustrate the detailed explanations for the four additional ratios
calculated by ABEL:
1988 1987 1986 198S 1984
Current Ratio 0.9 1.8 10 2.2 2.0
The current ratio (CR) is defined as the firm's current
assets divided by its current liabilities. The ratio
assesses whether the firm will be able to cover its
short-term debts using cash and other current assets
which can be easily liquidated.
A CR greater than Z0 generally indicates that a firm has good
liquidity. This firm's CR was strong in 1986, 1985, 1984.
A CR between 1.0 and 2.0 indicates that the firm may
su£fer from liquidity problems. This firm's CR was
unfavorable in 1987.
A CR less than 1.0 indicates that the firm has serious liquidity
problems. This firm's CR was poor in 1988.
Enter a carriage return to continue with individual ratio analysis.
4-6
September 1991
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128$ 1282 128$ 1285 1284
Times Int. Earned 1.2 ••••• 1.9 2.3 2.1
The times interest earned ratio (TIE) is defined as the
firm's earnings before interest and taxes divided by its
interest expense payments. This ratio indicates how easily
the firm can pay the interest expense on its debt
A lit greater than 2.0 generally indicates that the Sim is able to
meet its interest payments. This firm fell into this
category in 1985,1984
A lit less than 2.0 indicates that the firm may have trouble
meeting future interest payments. As the TIE decreases,
the likelihood and potential severity of the firm
experiencing problems in meeting those payments increase.
This firm's TIE was unfavorable in 1988,1966.
A TIE of ******* indicates that the firm had no interest expense
in that year.
Enter a carriage return to continue with individual ratio analysis.
4-7
September 1991
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1988 1212 198$ 1285 1984
Beaver's Ratio 0.07 0.10 0.19 0.21 0.23
Beaver's ratio (BR) is defined as the Grin's after-tax
cash flaw divided by its total liabilities. The BR
provides a useful measure for predicting a firm's long-
term solvency and likelihood of staying in business. In
particular, the BR indicates whether the firm's internally
generated cash flow is sufficient to meet its current and
long-term financial obligations.
A BR greater than 0.20 generally indicates that the firm is solvent
and healthy. This firm fell into this category in
1985, 1984.
A BR between 0.1 and 0.2 is inconclusive. This situation applied
to this firm in 1986.
A BR less than 0.1 generally indicates poor financial health. This
Arm fell into this category in 1988,1987.
Enter a carnage return to continue with individual ratio analysis.
4-8
Swftiptar 19^1
-------
122S 1MZ 1£8£ 1215 12M
Altman Z-Scorc
1.14 1.20 2J0 3.00 3.15
Altaian's Z-Score (AZS) is calculated as a weighted average
of several financial ratios. AZS is a predictor of firm
failure. It is most accurate within two years prior to
bankruptcy.
An AZS greater than 2.90 indicates that it is unlikely that the firm will
be forced into bankruptcy during the coming two yean. This firm's
AZS fell into this category in 1985,1984.
An AZS less than 1.23 indicates that the firm could be bankrupt
within the next two years if its financial situation does
not dramatically improve. This firm's AZS fell into this
category in 1988, 1967.
An AZS between 1.23 and 2.90 is inconclusive. This
situation applied to this firm in 1986.
Enter a carriage return to see Phase I conclusions.
When providing the detailed explanations of the individual ratios, ABEL compares the most
recent ratios with the historic averages. Specifically, these tests determine if any of the ratios bom
the most recent year of tax return data are significantly better (more than 50% higher) or significantly
worse (more than 50% lower) than the historic averages.2 A statement will appear in the detailed
explanations when the ratio is significantly better or worse than the average.
2 The most recent year's ratio value is excluded from the computation of the historic average.
Also, for the debt to equity ratio, the definitions of significantly better and significantly worse are
reversed.
c.
4-9
September 1991
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<*. Summary Phase I Conclusion
After providing the detailed ratio explanations (or immediately after the summary table, if the
detailed output is skipped), ABEL provides a Phase I scenario conclusion. The conclusion is based
on the five financial ratios for only the most recent year. If, however, one or more of the financial
ratios is significantly worse than the firm's historic average and the Phase II analysts shows that the
firm is unable to pay for environmental expenditures, you may want to consult with a financial analyst
to determine the cause of the decline,1
This firm's most recent year's financial ratios indicate that
the firm's financial condition is extremely poor. In addition,
the firm may have difficulty obtaining additional debt financing.
B. PHASE II ABEL ANALYSIS
1. Overview
Phase II of the ABEL program quantifies the firm's ability to pay for an environmental
expenditure. To make this determination, ABEL uses the three to five years of tax return data from
Phase I to project five years of internally generated, after-tax cash flows. ABEL then compares the
"present value" of these cash flows with the "present value" of the after-tax cash flows following the
3 As previously noted, one of the techniques used by financial analysts to assess changes in a
firm's financial health is to examine historic financial ratio trends, like those produced by ABEL at
the beginning of this section. Note that the Phase I overall conclusion does not analyze these trends,
however, as it only assesses the firm's ratios for the most recent year.
4-10
September 1991
-------
environmental expenditures that you have specified.4 After making the environmental expenditures,
if the present value of the Arm's remaining projected cash flows is still positive, ABEL will predict
that the firm can afford the expenditure.
While the general methodology for determining a firm's ability to pay is straightforward, the
actual details of the calculations are quite complex. Appendix B provides the detailed equations used
in Phase II, as an aid to financial analysts and for other interested users. It is not necessary, however,
to read Appendix B. All that is needed to successfully use the ABEL program is contained in the
main section of this manual.
ABEL will produce a Summary Table when enough data exists to perform a Phase II analysis.
If you would like an explanation of this summary, ABEL can be prompted to produce one. ABEL
then evaluates the probability that the firm can afford the environmental expenditures that you have
proposed. Lastly, ABEL will indicate whether tbr results might be overly optimistic. This scenario
ocdiirs when the most recent year's cash flows arc substantially less then average. Following the
summary analysts, you can choose to perform additional analysis, revise your Phase II input data, or
continue with the program.
4 The concept of net present value is based on the principle that "a dollar today is worth more
than a dollar a year from now," because today's dollar can be invested immediately to earn a return
over the coming year. Therefore, the earlier a cost (or benefit) is incurred, the greater its economic
impact ABEL accounts for this "time value of money" effect by reducing all estimated future cash
flows to their present value equivalents. This widely-used technique is known as discounting.
4-11 SfPftffjttT l?»l
-------
2. ABEL Snmmirv Analysis
After you have entered your Phase II inputs, ABEL provides the following message:
ABEL can now analyze the ability of XYZ Corporation
to pay for pollution control expenditures and a penalty.
Enter a carriage return when you are ready for the ABEL SUMMARY ANALYSIS.
This message will vary depending on whether you have supplied ABEL with a penalty, pollution
control expenditures, or both. In this case the user supplied both.
•. Ptowf 11 Swmiparr Table
Fust, ABEL produces a table showing the present value of the firm's projected cash Qows
over Gve years, both including and excluding the environmental expenditures that you specified. This
table will be the focus of almost all ABEL analyses.
ABEL SUMMARY ANALYSIS
CASE: XYZ Corporation
Date: February 23, 1991
Units: Thousands
ABEL Cash Flow
ABEL Cash Flow
Total ABEL
Net of Pollution
Net of P.C
Prob-
Cash Flow
Control
Expenditures
ability
Generated
Expenditures
& Penalty
(1)
(2)
(3)
(4)
50%
7972.
7612.
6612.
60%
7281.
6920.
592a
70%
6496.
6135.
5135.
80%
5433.
5073.
4073.
90%
2934.
2573.
1573.
95%
0.
o.
a
OOdL
0.
0.
a
4-12
September 1991
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Since the firm's projected cash flows are based on a statistical extrapolation of the firm's historical
cash flows, the table shows projected cash flows at seven different probability levels. These
probabilities reflect the likelihood that the firm will equal or exceed the specified level of cash flow.
In Column 2 of this table, the firm's projected after-tax cash flows are listed. These values
do not take any environmental expenditures or penalties into consideration.1 Column 3 reflects tae
cash flows listed in Column 2, minus any environmental expenditures. Thus, these values take both
the expenditures and their tax consequences into account. Column 4 represents Column 3 minus the
proposed civil penalty.
Following the table, ABEL prints a message summarizing the firm's ability-to-pay;
ABEL projects that there is a 91.9% probability that XYZ Corporation
can finance a penalty of S1000, a total initial pollution control
investment of $523 and annual pollution control expenses
of $10 through the funds the company generates over the next Ave
years. All figures are expressed in Thousands and 1991 year-dollars.
This message indicates the probability that the firm can meet the proposed penalty (and/or pollution
control expenditure) through its projected cash flows.
5 The values listed in column 2 are the present-values of five yean of projected cash flows.
4-13 Swtwbw IW1
-------
b. Detailed Explanation of the Components of the Summary Analysis
After printing the above table and message, ABEL will ask whether you would like an
explanation of any of the information in the ABEL Summary Analysis.
Would you like an explanation of any of the information in the ABEL SUMMARY
ANALYSIS? (Y = yes, N = No)
Y
If your response is affirmative, ABEL will respond:
The ABEL SUMMARY ANALYSIS shows the funds that XYZ Corporation can
generate internally over the next five years to pay for pollution control
expenditures and penalties. These funds, or cash flows, are expressed
in 1991 dollars. The ABEL SUMMARY ANALYSIS shows the total funds available
(coL 2), funds available net of pollution control expenditures (col. 3),
and the funds available net of pollution control expenditures and
the proposed penalty payment (col. 4).
Which column of the ABEL SUMMARY ANALYSIS would you like explained in
more detail?
1. Probability
2. Total ABEL Cash Flow (C.F.) Generated
3. ABEL CF. Net of Pollution Control (P.C.) Expenditures
4. ABEL C.F. Net of P.C. Expenditures and Penalty Payment
5. None. I want to proceed with the Phase II analysis.
4-14 September 1991
-------
If you select Column 1, ABEL will provide the following information:
Column (1) in the ABEL SUMMARY ANALYSIS defines the likelihood that a
particular row's cash flows will occur. For example, there is a 90%
probability that XYZ Corporation can generate total cash flows of
2934 (coL 2), cash flows net of pollution control expenditures
of 2573 (coL 3), and cash Sows net of pollution control
expenditures and penalty payment of 1S73. (coL 4).
If you select Column 2, ABEL will provide the following information:
Column (2) in the ABEL SUMMARY ANALYSIS shows the total cash flow that
ABEL predicts a available for penalty payment and pollution control
expenditures. ABEL provides you with a range of cash flows that might be
generated based on its statistical analysis. Thus there is a 50% probability
that XYZ Corporation can generate total cash flows of 7972,
and a 90% probability that XYZ Corporation can generate total cash Qows
of 2934.
4-15
Swtwifrr 1P31
-------
If you select Column 3, ABEL will provide the following information:
Column (3) in the ABEL SUMMARY ANALYSIS shows the total cash flow that
ABEL predicts is available after pollution control expenditures. If there
are no pollution control expenditures or annual costs in your Phase II
analysis, then Column (3) should equal Column (2). ABEL provides you with
a range of cash flows that might be generated based on its statistical
analysis. Thus there is a 50% probability that XYZ Corporation can
generate total cash flows after pollution control expenditures of
7612 and a 90% probability that XYZ Corporation can generate
total cash flows after pollution control expenditures of 2573.
If you select Column 4, ABEL will provide the following information:
Column (4) in the ABEL SUMMARY ANALYSIS shows the total cash flow that
ABEL predicts is available after pollution control expenditures and penalty
payment. If there are no penalty payments in your Phase IT analysis, then
Column (4) should equal Column (3). ABEL provides you with a range of cash
flows that might be generated based on its statistical analysis. Thus there
is a 50% probability that XYZ Corporation can generate total cash flows
I after pollution control expenditures and penalty payment of 6612.
and a 90% probability that XYZ Corporation can generate total cash flows
after pollution control expenditures and penalty payment of 1573.
If you choose option 5, ABEL will proceed with the Phase II analysis. If you chose option
1, 2, 3, or 4, however, ABEL will provide the appropriate explanation before again asking which
column you would like explained in more detail. This process will continue until you choose option 5.
4-16
September 1991
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c. Determining If the Violator Can
P»t at the 70 Percent ProbabiHtv
If the ABEL analysis indicates that a firm cannot afford the penalty and/or environmental
expenditures at the 70 percent probability level, the model will provide the following message:
Note that ABEL's calculations indicate that while XYZ Corporation
will be able to generate funds over the next five years, there is
less than 70% certainty that those funds will be sufficient
to cover the proposed pollution control expenditures and/or penalty
payment. You should review all of your Phase I tax form data inputs.
If these inputs are correct, then you or a financial analyst should review the
company's tax returns to determine if there have been excessive
nonessential expenses or assets are available to support the pollution
control expenditures and/or penalty payment, [f there are no other sources of funds,
you can consider reducing the civil penalty.
A 70 percent probability b used because this is one common agency cut off for determining ability
to pay. Note, however, that it is ultimately up to the litigation team to determine an appropriate
cutoff. See the ABEL User's Guide for a fuller discussion of this issue.
After printing this message, ABEL will ask the following question:
Would you like more information on how to evaluate potentially nonessential
expenses and other possible sources of funds? (Y =* yes, N*no)
4-17
September 1991
-------
If you answer Y, ABEL will then print the following message:
The ABEL User's Guide provides a listing of areas to examine
for nonessential expenses and sources of additional funds. These include:
o Compensation of Officer (line 12 and Schedule E of 1989 form 1120)
o Cash dividends paid out to shareholders (line 5a of Schedule M-2 of 1989
form 1120)
o Contributions to charitable and other organizations
(line 19 of 1989 form 1120)
o Loans to stockholders (line 7d of Schedule L of 1989 form 1120)
o Nonessential assets which can be sold
If XYZ Corporation is a subsidiary of another company and it files its
own tax returns, then if possible, you should also perform a Phase I and
Phase n analysis using the parent company's tax returns.
d. Historic Comparison
Next, ABEL performs two tests to determine if the firm's most recent year's actual cash flow
(derived from the firm's tax return) was s:gnificantly worse than its historic average. If the firm fails
either of these tests, ABEL will print:
Based on the tax form data provided to ABEL, the most recent year's
pre-tax cash flow for XYZ Corporation is significantly worse
than its inflation-adj us ted historic average. If this poor cash flow
were to continue in the future, then the ABEL SUMMARY ANALYSIS cash
flow figure* are overly optimistic. Therefore, ABEL strongly recommends
that when yoo have completed this Phase II analysis, you rc-run Phase II
using a smoothing constant of 0.7 (Standard Value 5 in the Phase II
input section). This larger smoothing constant will weight the most
recent year's cash flow much more heavily than those of other years' in
the ABEL SUMMARY ANALYSIS cash flow calculations.
4-18 S
-------
This message is the only situation where ABEL will recommend that you change the weighted
average smoothing constant standard value. This value should not be changed otherwise, unless a
financial analyst reviews the data and recommends that it be changed.
3. Other Phase II Analysis Options
Having completed the Phase II Summary Analysis, ABEL will offer you the option of
conducting further Phase II analyses:
What further Phase II analysis would you like?
1.
Calculate the annual penalty amount for a penalty which
is to be spread over more than one year.
2.
ABEL's evaluation of historical cash flows.
3.
A more detailed version of the ABEL SUMMARY ANALYSIS.
4.
Modify Phase II input values.
5.
None of the above. Proceed to ABEL Output Menu.
Each option is described below.
4-19
-------
a. Option I: Penalty Payment Over More than One Year
Option *1* should be run if you are considering a penalty payment scheme where the violator
pays the penalty over several years. Spreading the penalty over several years (ABEL allows you to
spread it over two to five years) does not affect a.iy of the ABEL Summary Analysis values. The
probability that a firm can afford to pay the environmental expenditures and/or civil penalty remains
exactly the same.4 When you select option "1", ABEL will state:
Rather than paying a single lump-sum penalty at the beginning of 1991,
XYZ Corporation could spread payment of that penalty over several years
in equal installments. The first installment would occur in 1991
and the remaining installments would occur at the same time in each of
the following yean.
Over how many yean would you like to spread the penalty?
(Select an integer vahie greater than 1 and less than or equal to S.)
3
In response you should select 2, 3, 4 or 5 years. Then ABEL will state:
A lump-sum settlement penalty of $ 1,000,000 (expressed in 1991
dollars) is exactly equal to 3 years of annual payments of $ 372,047.
6 The stream of annual penalty payments is calculated so that its present value is the same as
the lump-sum penalty payment that was specified in the input section.
September 1991
4-20
-------
In this example, the user asked ABEL to spread a penalty amount of SI.000,000 (1991 dollars) over
3 years. ABEL calculated that the three annual payments should be $372,047.
b. Option 2: Historical Cash Flow Information
If you choose option "2", ABEL will provide a table showing the firm's cash flows from the
historical data that were provided. This table assists a financial analyst in understanding the
relationship between the firm's historical and projected cash flows.
ABEL is ready to present an analysis of historic cash flows for
XYZ Corporation. Enter a carriage return when you are ready.
After you have entered a carriage return, ABEL provides the following table:
ABEL's HISTORICAL CASH FLOW ANALYSIS
CASE: XYZ Corporation Date: February 23, 1991
Units: Thousands
Inflation-Adjusted
Pre-tax Cash Flow
Year
Pre-tax Cash Flow
1989
1988
1987
3000.
1570.
1400.
3301.
1811
1695.
Would you like an explanation of ABEL's HISTORICAL CASH FLOW ANALYSIS?
(Y=yes, N»no)
Y
4-21
September 1991
-------
[f you indicate that you would like an explanation of this table by responding Y, ABEL will
state:
Column (1) shows the historic pre-tax internally-generated
cash flows by year for XYZ Corporation expressed in
their respective yean' dollars. Column (2) shows the same
pre-tax cash Qow values, but expressed in 1991 dollars so
that they can be compared on an inflation-adjusted basis. Both
columns are based on the tax return data which you have
entered.
c.
Option 3: Detailed ABEL Summary Analysis
If you choose option "3", ABEL will provide a more detailed version of the Summary Analysis
presented at the beginning of Phase II:
DETAILED ABEL SUMMARY ANALYSIS
CASE: XYZ Corporation
Prob-
ability
50%
60%
70%
90%
95%
99%
Total ABEL
Cash Flow
Generated
7972.
7281.
6496.
5433.
2934.
0.
0.
Date: February 23, 1991 Units: Thousands
Initial
Pollution
Control
Cash Flow
335.
335.
335.
335.
335.
335.
335.
Annual
Pollution
Control
Cash Flow
26.
26.
26.
26.
26.
26.
26.
ABEL Cash Flow
Net of Pollution
Control
Expenditures
7612.
692a
6135.
5073.
2573.
0.
0.
4-22
September 1991
-------
Immediately following this detailed summary analysis. ABEL will ask if you would like any of the
columns explained:
Which column of the DETAILED ABEL SUMMARY ANALYSIS would you like
explained in more detail?
1. Probability
2. Total ABEL Cash Flow (C.F.) Generated
3. Initial Pollution Control (P C.) CF.
4. Annual Pollution Control CF.
5. ABEL C.F. Net of P.C Expenditures
6. None. I want to proceed with the Phase II analysis.
If you select Column 1, AL*X will provide the following information:
Column (1) in the DETAILED ABEL SUMMARY ANALYSIS defines the likelihood
that a particular row's cash flows will occur. For example, there is
a 90% probability that XYZ Corporation can generate total cash
flows of 2934 (coL 2), and cash flows net of pollution control
expenditures of 2573. (coL 5).
4-23
September 1991
-------
If you select Column 2, ABEL will provide the following information:
Column (2) in the DETAILED ABEL SUMMARY ANALYSIS shows the total cash
flow that ABEL predicts is available for penalty payment and pollution
control expenditures. ABEL provides you with a range of cash flows
that might be generated based on its statistical analysis. Thus,
there is a 50% probability that XYZ Corporation can generate
total cash flows of 7972, and a 90% probability that
XYZ Corporation can generate total cash flows of 2934.
If you select Column 3, ABEL will provide the following information:
Column (3) in the DETAILED ABEL SUMMARY ANALYSIS shows the net total
of the initial pollution control investment and the present value of
five years' of the related depreciation and deduction tax shields.
The values in column (3) are the same for all probability levels.
If you select Column 4, ABEL will provide the following information:
Column (4) in the DETAILED ABEL SUMMARY ANALYSIS shows the present
value of five years' of the after-tax annual costs of the pollution
control activity. The values in column (4) are the same for all
probability levels.
4-24
September 1991
-------
If you select Column 5, ABEL will provide the following information:
Column (5) in the DETAILED ABEL SUMMARY ANALYSIS showr the total cash
flow that ABEL predicts is available after pollution control
expenditures. Column (5) is column (2) minus columns (3) and (4). ABEL
provides you with a range of cash flows that might be generated based
on its statistical analysis. Thus there is a 50% probability that
XYZ Corporation can generate total cash flows after pollution
control expenditures of 7612 and a 90% probability that
XYZ Corporation can generate total cash flows after pollution
control expenditures of 2S73.
If you choose option "6", the program will return to the ABEL Optional Phase II Analysis
choices. If you choose a 1, 2, 3, 4. or 5. after printing the respective explanation on your terminal.
ABEL will again ask which column you would like explained in more detail. This process continues
until you choose option "6".
d. Option 4: Modify Phase II Incuts
If you choose option "4" (Modify Phase II input values), ABEL wiH go to the beginning of
the Phase II input section without clearing the values that have already been entered. At this time,
you can modify any of the pollution control costs, the penalty, and/or standard value incuts to obtain
revised Phase II results.
«• Option 5: None of the Above. Proceed to ABEL Output Menu.
If you choose option "5\ ABEL will provide you with an Output Menu. This menu, and
other printing and exiting procedures are discussed in detail in Chapter 5.
4-25
September 1991
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SAVING, RETRIEVING AND PRINTING
ABEL FILES AND EXITING THE PROGRAM
CHAPTER 5
This chapter discusses four important features of the ABEI model: saving data to an input
file, i etrieving data from an input file, printing ABEL results, and exiting from the program. These
features are designed to be flexible and easy to use, serving both novice and experienced users.
A. SAVING DATA TO AN INPUT FILE
One of ABEL's useful features is the option to save your inputs in a file which can be
retrieved at a later time. This option allows repeated analysis of a particular firm without retyping
all of the inputs. The save option also allows you to save tax data you have already entered, in case
you need to leave the program before finishing data entry.
I. Savlnt Input Data Using the "S* Command
As described in Chapter 2, ABEL allows you to save your Phase I data at any point during
data entry by typing S. When you type S, ABEL will provide the following message:
Please enter the name of the file in which you would like to save your
inputs. Enter a carnage return to cancel.
September 1991
-------
At this point, type the name of the file in which you want to save the firm's data. Your file name
can be up to eight letters followed by a period, followed by three more letters. The file name you
choose should ciearly indicate to which case the tile pertains. We recommend that you use the .ABL
extension to indicate that the Hie contain:. ABEL data. For example, if the company you are
analyzing is ABC Corporation, you may want to name your file ABCCORP.ABL. If you have more
than one file pertaining to a case, you may find it helpful to refer to your list of ABEL files when
naming the file. Procedures for -eviewing this list of files are described later in this chapter.
2. Saving Input Data When Exiting the Program
To prevent you from accidentally exiting the ABEL program without saving your Phase I data.
ABEL will ask if you would like to save your Phase I inputs before quilting the program. For
example, if you are in the middle of entering data and you type "Q" to exit the program, ABEL asks:
12. Please enter Trade Notes and Accounts Receivable Less Bad Debts
(in Thousands)
Q
••• YOU ARE ABOUT TO EXIT ABEL. ***
Do you want to save your inputs first (Y=yes, N=no)?
If you would like to save your data to an input file, type Y. ABEL then asks you to najie the file.
When naming your file, you should follow the directions provided above. If you do not want to save
the data that have been entered, type N to exit the program.
5-2
frpfrrobcr 199}
-------
3. Overwriting an Existing File When Saving Input Data
If you provide ABEL with a filename lhal already exists, ABEL will ask if you want to
overwrite the old file by providing the folk,wing message;
Please enter the name of the file ,n which you would like to save your
inputs. Enter a carriage return to cancel
ABCCORPABL
File already exists. Do you want to overwrite it (Y/N)?
If you type Y. ABEL will save your latest set of data inputs to the file. This file will include any
inputs added during your most recent ABEL session, as well as any unaltered inputs from the data
tile that was retrieved during the ABEL session. For example, you can retrieve a data file that
contains two years of tax data, add another year of data, and save the file under the original name
to save all three years of data. ABEL data entry files will be saved for up to one year on EPA's
mainframe computer.
If you type N when prompted, ABEL will ask you to type a different filename to save your
input data. At this point you may wish to refer to the list of ABEL files in your directory or account.
The procedure for obtaining this list is described in the next section.
B. RETRIEVING DATA FROM AN INPUT FILE
If you are planning to use a file from a previous ABEL session, or if you are planning to
enter data that will be saved in a new file, it may be helpful to look at the names of *he Files in your
account or directory. Before beginning the ABEL program, you should check the list of ABEL files
in your account or directory. To produce this list on the EPA mainframe, type UST.CAT and enter
a carriage return before executing the ABEL program. The EPA mainframe will archive any files
that are not used for a period of two weeks. This may cause a delay when you go to retreive a file.
In addition, the ma'::f.?me only saves files for up to one year. If you are using a PC, this list can be
September 1991
-------
[irodurci hy typing DIR/P followed by a carriage return. It is helpful to write down the name of each
AKLL aiput file you might want to retrieve while running the program.
After the introduction to the program. ABEL asks if you would like to enter the tax data
manually or through a previously created input file:
I How will you enter data for the ABEL analysis?
1 Enter data during ABEL session.
2. Use a previously saved file.
Enter your selection (1 or 2):
II ynu type 2 ABEL asks for the name of the file to be retrieved. Refer to the list you developed
prior to the ABEL session to ensure that you type the correct filename.
ABEL is designed so that you can retrieve a partially compk" d data set, and proceed with
the data entry process. After you have retrieved an input file, ABEL will give you the following
choices:
You have entered data for 1989, 1988.
Which year of data would you like to view?
Select;
1. 1989
1 1988
R. Resume entering tax data
If you would like to resume entering data, type R and ABEL will resume where data entry was last
terminated.'
1 Note that you cmnot add data beyond the "most recent year" that you entered in your original
data entry session. For instance, if you selected 1989 as the "most recent year", you cannot add 1990
tax data date without re-entering the data for all previous years.
5-4
September 1991
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C. PRINTING ABEL OUTPUT AND EXITING THE PROGRAM
1. Accessing the ABEL Output Menu
After you have completed both the Phase I and Phase II analyses. ABEL provides additional
options for Phase II analysis (See Chapter 4). One of these options is "None of the Above. Proceed
with ABEL Output Menu." When this option is selected. ABEL will provide the following menu of
choices:
ABEL Output Menu:
Select the data inputs and ABEL results you want saved in a Hie for
printing from the following:
1. Phase I and Phase II Inputs. Entire Phase I and Phase II Results.
2. Phase I and Phase II Inputs. Phase I and Phase II Summary Results.
3. Phase I Inputs. Entire Phase I Results.
4. Phase II Inputs. Entire Phase II Results.
5. None. Proceed with the program.
Each of the first four options generates different output formats for your ABEL results. The first
option provides the most information. If this option is selected, you will receive the complete ABEL
output for both Phase i and Phase II. The second option restricts the output to the summary
analyses from each phase of the program. The third and fourth options restrict the output to Phase
I and Phase II. respectively. With one exception, ABEL also includes both your Phase I and Phase II
inputs with the printout of your results.'
If you type 3, indicating that you want only the Phase I output, ABEL includes your Phase I but
not your Phase II inputs.
5-5 September 1991
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2. Concluding an ABEL Analysis
After you have selected a print option. ABEL provides the following message:
I How would you like to proceed with your ABEL analysis of XYZ Corporation ?
1. Modify Phase I input values.
2. Clear data inputs: evaluate a different case.
3. Conclude this ABEL Session.
If you choose 1, indicating that you want to modify your Phase I inputs. ABEL allows you to choose
the year of data you wish to review, to go on with Phase I. or to quit the program. If you type 2,
indicating that you would like to run another case, ABEL brings you back to the beginning of the
program. If you type 3, your ABEL session will end. When ABEL is done exiting the program, you
will have the option of printing the output you designated in the Output Menu. The message reads:
Alt of your output bas been saved in a file.
Do you want the output to be printed (Y = yes, N = no)?
If you type Y and you are working on a PC, ABEL will print your hard copy to the printer that is
attached to your PC, and you will return to the operating system. If you type Y and you are working
on a mainframe, you should follow the directions provided below. After following the printing
procedures, or if you type N, you will be ready to log off of the mainframe. See the ABEL User's
Guide for detailed instructions on this procedure. By using this Output Menu, you have saved your
output in a file called OUTPUT.DAT. This file is over written each time you use the Output Menu
to generate ABEL output. Thus, if you wish to save a file version of the output, you should rename
OUTPUT.DAT after concluding the ABEL session.
5-6
September 1991
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3. Receiving a Printout from the Mainframe
If you are working on the mainframe. ABEL will ;
-------
This number is your user identification number preceded by the letter M (e.g., MXXX). Your
output will be mailed to the address recorded in your account information. Your output should arrive
in three to live days." ABEL then notifies you that your output will be printed and delivered or
mailed:
YOUR OUTPUT WILL BE PRINTED AT THE COMPUTER CENTER AND
ROUTED TO YOUR BIN OR MAILED TO YOU.
4. Printing ABEL Output to a Local Printer
Another way to receive a printout of your ABEL results is to direct the output file to aa local
printer. To do this, you should type N when asked "Do you want the output to be printed" as you
do not want it printed on the mainframe. When you respond N, you will reach the "ready" prompt.
.V *h'c there are several ways to print your output to a local printer. The name of the file you
want to priiit is OUTPUT.DAT. Because the particular method used to print this file varies from
region to region, it is not feasible to lis: all of the options in this document. Contact your local
computer specialist for the most efficient way of printing this file.
2 If you are using a TTY and already have a paper copy of the output, or if you have copied your
session on a PC file through your communications software, you probably do not want to receive
another copy. In this case you simply type N when ABEL asks if you want to receive a printed copy.
ABEL will then proceed to logoff and will not ask additional questions.
5-8 September 1991
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SAMPLE SESSION
CHAPTER 6
The previous sections of this manual have provided numerous examples of ABEL output to
demonstrate error messages, format of data entries, and output screens. This chapter of the ABEL
User's Manual is devoted to going through a complete ABEL analysis from start to finish for a
hypothetical firm. Most of ABEL's output options will be demonstrated through this analysis of a
hypothetical firm. The case is based on three years of tax data taken from tax Form 1120 for
1988-1990 and organized on the ABEL Data Entry forms as shown in Exhibit 6-1.'
The complete ABEL session performed with the data from Exhibit 6-1 is shown in
Exhibit 6-2.
1 Blank copies of the ABEL data entry forms are provided in Appendix A
6-1
September 1991
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Exhibit 6-1
ABEL DATA ENTRY FORM 6:
BACKGROUND INFORMATION FOR PHASE I ANALYSIS
n
ENTER THE FOLLOWING BACKGROUND INFORMATION ON YOUR CASE:
ITEM
INPUT
1. Name of Finn
ABC Corporation
2. Statute
Clean Water Act • NPDES
3. Number of Yean of Data Available (1-5)
3
4. Most Recent Year Available (e.g., 1989)
1990 |
Note: For all of the Phase I and Phase II data inputs, make sure all entries have consistent units
(e.g., thousands at dollars).
6-2
September 1991
-------
Fill in data year:
DATA ENTRY FORM FOR 1989 AND 1990 TAX FORM 1120
1990
1. Gross Receipts or Sales Less Returns and Allowances (Line 1c)
170,000
2. Interest Expense (Line 18)
3,000
3. Depreciation (Line 201
45,000
4. Depletion (Line 22)
0
5. Taxable Income Before NOL and Special Deductions (Line 28)
200,000
6. NOL Deductions (Line 29a)
0
7. Special Deductions (Line 29b)
0
8. Total Tax (Line 31)
80,000
9. Credit from Regulated Investment Companies (Line 32f)
0
10. Credit for Federal Ta.\ on Fuels (Line 32g)
80,000
11. Cash (Schedule L Line !)
80,000
12. Trade Notes and Accounts Receivable Less Allowance for Bad
Debts (Schedule L. Line 2b)
120,000
13. Inventories (Schedule L I ine 3) |
300,000
14. U.S. Government Obligations (Schedule L, Line 4)
40,000
15. Tax-Exempt Securities (Schedule L, Line 5)
0
16. Other Current Assets (Schedule L. Line 6)
60,000
17. Accounts Payable (Schedule L, Line 16)
50,000
| 18. Mortgages, Notes, Bonds Payable in Less Than One Year
(Schedule L Line 17)
130,000
19. Other Current Liabilities (Schedule L, Line 18)
20,000
20. Loans from Stockholders (Schedule L. Line 19)
2,000
21. Mortgages, Notes, Bonds Payable in One Year or More
(Schedule L, Line 20)
100,000
22. Other Liabilities (Schedule L, Line 21)
0
23. Appropriated Re ained Earnings (Schedule L, Line 24)
0
24. Unappropriated Retained Earnings (Schedule L Line 25)
780,000
| 25. Total Liability and Stockholders' Equity (Schedule L, Line 27)
1,200,000
26. Income Recorded on Books not Included in Return g
(Schedule M-l, Line 7) R 0
Note: All Form 1120, Schedule L, entries should be taken from column (d), the right-most column.
-------
Exhibit 6-1
(continued)
ABEL DATA ENTRY FORM 3: 1989 AND 1990 FORM 1120
Fill in data year:
DATA ENTRY FORM FOR 1989 AND 1990 TAX FORM 1120
1989
1. Gross Receipts or Sales Less Returns and Allowances (Line Ic)
130,000
2. Interest Expense (Line 18)
31,000
3. Depreciation (Line 20)
42,000
4. Depletion (Line 22)
0
S. Taxable Income Before NOL and Special Deductions (Line 28)
| 300,000
1 6. NOL Deductions (Line 29a)
0
| 7. Special Deductions (Line 29b)
0
| 8. Total Tax (Line 31)
120,000
9. Credit from Regulated Investment Companies (Line 320
0
10. Credit for Federal Tax on Fuels (Line 32g)
0
11. Cash (Schedule L, Line 1)
110,000
12. Trade Notes and Accounts Receivable Less Allowance for Bad
Debts (Schedule L, Line 2b)
140,000
13. Inventories (Schedule L, Line 3)
270,000
14. U.S. Government Obligations (Schedule L, Line 4)
10,000
15. Tax-Exempt Securities (Schedule L, Line 5)
0
16. Other Current Assets (Schedule L, Line 6)
50,000
17. Accounts Payable (Schedule L, Line 16)
120,000
18. Mortgages, Notes, Bonds Payable in Less Than One Year
(Schedule L Line 17)
20,000
19. Other Current Liabilities (Schedule L, Line 18)
40,000
20. Loans from Stockholders (Schedule L, Line 19)
55,000
21. Mortgages, Notes, Bonds Payable in One Year or More
(Schedule L Line 20) |
44,000
22. Other Liabilities (Schedule L, Line 21)
0
23. Appropriated Retained Earnings (Schedule L, Line 24)
0
24. Unappropriated Retained Earnings (Schedule L, Line 25)
770,000
25. Total Liability and Stockholders' Equity (Schedule L, Linn 27)
1,150,000
26. Income Recorded on Books not Included in Return
(Schedule M-l, Line 7)
0
Note: All Form 1120, Schedule L, entries should be taken from column (d), the right-most column.
-------
Exhibit 6-1
(continued)
ABEL UATA ENTRY FORM 2: 1988 FORM J120
DATA ENTRY FOr<.M FOR 1988 TAX FORM 1120
1988 VALUE
1. Gross Receipts or Sales Less Returns and Allowances (Line 1c)
150,000
2. Interest Expense (Line 18)
30,000
3. Depredation (Line 20)
| 40,000
4. Depletion (Line 22)
0
5. Taxable Income Before NOL and Special Deductions (Line 28)
400,000
6. NOL Deductions (Line 29a)
0
7 Special Deductions (Line 29b)
0
8. Totrl Tax (Line 31)
165,000
9. Credit from Regulated Investment Companies (Line 32f)
0
10. Credit for Federal Tax on Fuels (Line 32g)
5,000
(1 Cash (Schedule L. Line 1)
20.000
12. Trade Notes and Accounts Receivable Less Allowance for Bad
Debts (Schedule L, Line 2a)
280,000 |
13. Inventories (Schedule L, Line 3)
180,000 |
14. U.S. Government Obligaiions (Schedule L, Line 4)
20,000 |
15. Tax-Exempt Securities (Not available on Form 1120 in 1988)
N/A |
16. Other Current Assets (Schedule L, Line 5)
60,000 1
17. Accounts Payable (Schedule L. Line 15)
110,000 |
18. Mortgages, Notes, Bonds Payable in Less Than One Year
(Schedule L. Line 16)
0
19. Other Current Liabilities (Schedule L, Line 17)
80,000
20. Loans from Stockholders (Schedule L, Line 18)
0
21. Mortgages, Notes, Bonds Payable in One Year or More
(Schedule L, Line 19)
80,000
22. Other Liabilities (Schedule L. Line 20)
0 I
23. Appropriated Retained Earnings (Schedule L, Line 23)
0 |
24. Unappropriated Retained Earnings (Schedule L. Line 24)
60,000
25. Total Liability and Stockholders' Equity (Schedule L, Line 26)
1,100,000
26. Income Recorded on Books not Included in Return
(Schedule M-l I ine 7)
0
Note; All Form 1120, Schedule L, entries should be taken from colunv . vd), the r»;ht-most column.
6-
September 1991
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Exhibit 6-1
(continued)
ABEL DATA ENTRY KORM 7:
KEY VALUES FOR PHASE II ANALYSIS
ENTER THE FOLLOWING DATA FOR PHASE II ANALYSIS:
ITEM
DOLLARS
YEAR
1. Tlie year in which the company will be investing in
pollution control equipment, incurring dean up costs
and/or paying a penalty (e.g„ 1991).
Not
Applicable
1991
B 2. The proposed iurnp-sum settlement penalty (e.g.,
100000). 1/ there is no penalty, enter a zero.
250.000
Not
Applicable
3. lite depreciable cost of dilution control
investment followed by yeaj-end dollars (e.g., 60000
1989). The cost oi land should not be included in this
figure. Enter zero if this cost category is not
| applicable.
50,000
1990 I
I 4. The non-depreciable, -on-tax-deductible one-time
1 costs (e.g., the cost of land" followed by year-dollars
| (e.g., 150000 1989). Enter zero if th'> cost category is
not applicable.
0
5. The non-depreciable but tax-deductible one-time
costs (e.g., site clean-up compliance costs) followed
by year-dollars (e.g., 30000 1989). Enter zero of this
cost category is not applicable.
0
6. The annual costs of the pollution control activity
| (e.g^ operating and maintenance costs) followed by
I year-dollars (e.g., 5000 1990). Enter zero if there are
J no annual costs.
50,000
1990
6-6
September 1991
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Exhibit 6-2
COMPLETE ABEL SESSION
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Version 2.0. July 1991
Welcome to ABEL. ABEL evaluates a firm's ability to pay pollution
control expenditures, environmental clean-up costs, and/or a civil
penalty. This version of ABEL was introduced in 1991.
Would you like an introduction (Y=yes,N=no)?
Y
INTRODUCTION TO ABEL:
ABEL performs financial calculations designed to measure the financial
health of a firm. ABEL is designed to help answer the question:
Based on the strength of the firm's projected future cash flows, wl.at is
the likelihood that the firm could finance a civil penalty, invest in
pollution control equipment, or clean up a Superfund site?
The abiiity-to-pay calculations performed by ABEL are broken into two phases.
In Phase I, you are asked to provide general case information as well as one
to five years of tax data. ABEL accepts tax data directly from tax forms 1120
and 1120-A. ABEL can also use other federal tax returns, such as Form 1120-S,
Form 1065, and the sole proprietorship form (see Appendix C, ABEL User's
Manual). You may want to use the ABEL Data Entry Sheets included in the ABEL
User's Manual to simplify the data entry process. For each year, you are
asked for 2 3 to 26 inputs, depending on the tax form you are using.
Press the carriage return (or enter key) for the next page of text.
INTRODUCTION TO ABEL (CONT.):
Phase II evaluates the firm's ability to pay pollution control costs or
penalties. Phase II analysis requires at least three years of tax data. If
you have not entered three years of data, you will be given an opportunity
-------
to do so. You will also be asxed for the penal./ and pollution control costs
you wish to evaluate. ABEL contains a set of standard values used for the
Phase II analysis. You are given the option of chancing the standard
values, although you should change them only if there is a compelling reason.
After entering your data, in either Phase I or Phase II, you can review your
inputs before ABEL perforins its financial calculations. After completing
Phase II, you are oiven ihe opportunity to change some or all of the values
you have provided, and to perform another Phase I and/or Phase II calculation
without leaving the program or losing your data.
Press the carriage return (or enter key) for the next page of text.
INTRODUCTION TO ABEL (CONT.):
At the conclusion of your session, ABEL will allow you to save your inputs
for future use. Also ABEL can provide you with a printed copy of your data
inputs and Phase I and Phase II results.
Explanations of the procedures and financial basis for ABEL is provided in
the ABEL User's Manual. If you need additional information or need a copy of
the Manual, call EPA Headquarters:
FTS-475—6777 or 202-475-6777
You can obtain help in entering any of the variables simply by typing the
letter H after ABEL prompts you for the variable. After providing the Help
explanation, ABEL will prompt you again for the same variable.
Press the carriage return (or enter key) for the next page of text.
INTRODUCTION TO ABEL (CONT.):
ABEL allows only certain data formats for numerical values and dates.
Numerical values (costs, rates,percentages, years) should be entered without
conas, dollar signs, or percent signs. For example, enter a $10,000 cost as
10000 and enter 20% as 20. Use decimals only for fractional values, such an
10000.50 dollars, or 20.1 percent. Be careful to use only number keys. A
common mistake is typing the lowercase letter L instead of the number 1.
Another error is typing the letter O instead of the number 0.
You should Also uka sure all data are entered in consistent units, that is,
if you start entering data in thousands of dollars, e.g. $10,000,000 as 10000
you must use that convention throughout. ABEL will provide output in the same
units you used for input.
O
S»nt»mh»r 1001
-------
You may leave the ABEL program without leaving the main computer system at
any point during the program by typing the letter Q at any prompt. ABEL will
warn you that quitting the program will mean losing all work done in that
session, and will ask you if you ">re sure you want to quit. Answering yes
will terminate the program inunedi&wPiand take you back to the main
computer system.
Press the carriage return (or enter key) to begin ABEL.
How will you enter aata for the ABEL analysis?
1. Enter data during ABEL session.
2. Use a previously saved file.
Enter your selection (1 or 2):
1
If you want to save your inputs at any time during the Phase I
input, type "S".
ABEL will now ask you some background information on your case:
1A. Please enter the name of the firm to be analyzed (e.g., ABC Corp.)
ABC CORPORATION
IB. Please identify the statute involved in your case. If your case
involves more than one statute, please pick the most important one.
1. Clean Air Act - Stationary source
2. Clean Air Act - Mobile source
3. Clean Water Act - 404
4. Clean Water Act - NPDES
5. FIFRA
6. UST (Underground Storage Tank)
7. RCRA (Other than UST)
8. Safe Drinking Water Act - uic
9. Safe Drinking Water Act - PWS
10. Superfund
11. TSCA
12. Other
Enter the number of the statute you have selected:
4
2. Please enter today's date (e.g. June 1, 1990):
JULY 31, 1991
3. Please Enter the Number of Years of Data Available
3
4. Please Enter the Most Recent Year
1990
Please enter the units that you are going to enter your data in:
1. Dollars.
6-9
September 1991
-------
2. Thousands of dollars.
3. Millions of dollars.
For example, if you choose "2", Thousands of dollars, you
must enter all data inputs in thousands of dollars. (e.g.
$10,000 must be entered as "10".)
2
>>> Please enter data for 1990:
Which form are you using for year 1990?
1) ABEL Dat.a Entry Form 2) Form 1120 3) Form 1120A
1
1. Please enter Gross Receipts or Sales Less Returns & Allowances
(in Thousands)
170
3
2. Please enter Interest Expense
iin Thousands)
2
3. Please enter Depreciation
(in Thousands)
45
4. Please enter Depletion
(in Thousands)
0
5. Please enter Taxable Income Before Net Operating Loss
(in Thousands)
2000
6. Please enter Net Operating Loss Deductions
(in Thousands)
B
5. Please enter Taxable Income Before Net Operating Loss
(in Thousands)
(Current Value - 2000.00, press ENTER to retain it)
200
6. Please enter Net Operating Loss Deductions
(in Thousands)
(Current Value » 0.00, press ENTER to retain it)
o
7. Please enter Special Deductions
(in Thousands)
0
8. Please enter Total Tax
(in Thousands)
8
9. Please enter Credit from Regulated Investment Companies
6-10
September 1991
-------
(in Thousands)
0
TO. Please enter Credit for Federal Tax on Fuels
(in Thousands)
80
11- Please enter Cash
(in Thousands)
80
12. Please enter Trade Notes & Accounts Receivable Less Bad Debts
{in Thousands)
120
13. Please enter Inventories
(in Thousands)
300
14. Please enter U.S. Government Obligations
(in Thousands)
40
15. Please enter Tax-Exempt Securities
(in Thousands)
0
16. Please enter Other Current Assets
(in Thousands)
60
17. Please enter Accounts Payable
(in Thousands)
50
18. Please enter Mortgages, Bonds Payable in Less Than One Year
(in Thousands)
130
19. Please enter Other Current Liabilities
(in Thousands)
20
20. Please enter Loans from Stockholders
(in Thousands)
20
21. Please enter Mortgages, Bonds Payable in One Year or More
(in Thousands)
B
20. Please enter Loans from Stockholders
(in Thousands)
(Current Value - 20.00, press ENTER to retain it)
2
21. Please enter Mortgages, Bonds Payable in One Year or More
(in Thousands)
(Current Value = 0.00, press ENTER to retain it)
100
-------
22. Please enter Other Liabilities
(in Thousands)
0
23. Please enter Appropriated Retained Earnings
(in Thousands)
0
24. Please enter Unappropriated Retained Earnings
(in Thousands)
1200
25. Please enter Total Liability and Stockholders'Equity
(in Thousands)
B
24. Please enter Unappropriated Retained Earnings
(in Thousands)
(Current Value * 1200.00, press ENTER to retain it)
780
25. Please enter Total Liability and Stockholders'Equity
(in Thousands)
(Current Value = 0.00, press ENTER to retain it)
1200
26. Please enter Income Recorded on Books not Included in Return
(in Thousands)
0
»> Please enter data for 1989:
Which form are you using for year 1989?
1) ABEL Data Entry Form 2) Form 1120 3) Form 1120A
1
1. Please enter Gross Receipts or Sales Less Returns & Allowances
(in Thousands)
130
2. Please enter Interest Expense
(in Thousands)
31
3. Please enter Depreciation
(in Thousands)
42
4. Please enter Depletion
(in Thousands)
0
5. Please enter Taxable Income Before Net Operating Loss
(in Thousands)
300
6. Please enter Net Operating Loss Deductions
(in Thousands)
0
-------
7. Please enter Special Deductions
(in Thousands)
0
8. Please enter Total Tax
(in Thousands)
120
9. Please enter Credit from Regulated Investment Companies
(in Thousands)
0
10. Please enter Credit for Federal Tax on Fuels
(in Thousands)
0
11. Please enter Cash
(in Thousands)
110
12. Please enter Trade Notas 6 Accoums Receivable Less Bad Debts
(in Thousands)
140
13. Please enter Inventories
(in Thousands)
270
14. Please enter U.S. Government Obligations
(in Thousands)
10
15. Please enter Tax-Exempt Securities
(in Thousands)
0
16. Please enter Other Current Assets
(in Thousands)
50
17. Please enter Accounts Payable
(in Thousands)
120
18. Please enter Mortgages, Bonds Payable in Less Than One Year
(in Thousands)
20
19. Please enter Other Current Liabilities
(in Thousands)
40
20. Please enter Loans from Stockholders
(in Thousands)
55
21. Please enter Mortgages, Bonds Payable in One Year or More
(in Thousands)
44
-------
22. Please enter Other Liabilities
(in Thousands)
0
23. Please enter Appropriated Retained Earnings
(in Thousands)
0
24. Please enter Unappropriated Retained Earnings
(in Thousands)
770
25. Please enter Total Liability and Stockholders'Equity
(in Thousands)
1150
26. Please enter Income Recorded on Books not Included in Return
(in Thousands)
0
>» Please enter data for 1988:
Which form are you using for year 1988?
1) ABEL Data Entry Form 2) Form 1120 3) Form 1120A
1
1. Please enter Gross Receipts or Sales Less Returns & Allowances
(in Thousands)
150
2. Please enter Interest Expense
(in Thousands)
30
3. Please enter Depreciation
(in Thousands)
40
4. Please enter Depletion
(in Thousands)
0
5. Please enter Taxable Income Before Net Operating Loss
(in Thousands)
400
6. Please enter Net Operating Loss Deductions
(in Thousands)
0
7. Please enter Special Deductions
(in Thousand:;)
0
8. Please enter Total Tax
(in Thousands)
165
9. Please enter Credit from Regulated Investment Companies
6-14
SfBtsmber 1991
-------
{in Thousands)
0
10. Please enter Credit Cor Federal Tax on Fuels
(in Thousands)
5
11. Please enter Cash
(in Thousands)
20
12. Please enter Trade Notes & Accounts Receivable Less Bad Debts
(in Thousands)
280
13. Please enter Inventories
(in Thousands)
180
14. Please enter U.S. Government Obligations
(in Thousands)
20
15. Please enter Tax-Exempt Securities
(in Thousands)
16. Please enter Other Current Assets
(in Thousands)
60
17. Please enter Accounts Payable
(in Thousands)
110
18. Please enter Mortgages, Bonds Payable in Less Than One Year
(in Thousands)
0
19. Please, enter Other Current Liabilities
(in Thousands)
80
20. Please enter Loans frost Stockholders
(in Thousands)
. 0
21. Please enter Mortgages, Bonds Payable in One Year or More
(in Thousands)
80
22. Please entor Other Liabilities
(in Thousands)
0
23. Please enter Appropriated Retained Earnings
(in Thousands)
0
24. Please enter Unappropriated Retained Earnings
6-15
September 1991
-------
(in Thousands)
60
25. Please enter Total Liability and Stockholders'Equity
(in Thousands)
1100
26. Please enter Income Recorded on Books not Included in Return
(in Thousands)
0
You have entered Phase I data for 1990, 1989, 1988.
Which year of data would you like to review?
Select:
1. 1990
2. 1989
3. 1988
G. Go on to Phase I results
The
following 1990 data have been entered (in Thousands):
1.
Gross Receipts or Sales Less Returns & Allowances
170.00
2.
Interest Expense
32.00
3.
Depreciation
45.00
4.
Depletion
0.00
5.
Taxable Income Before Net Operating Loss
200.00
6.
Net Operating Loss Deductions
0.00
7.
Special Deductions
0.01
8.
Total Tax
8.00
9.
Credit from Regulated Investment Companies
0.00
Enter the number of the value you wish to change (e.g. enter 1 to change
Gross Receipts or Sales Less Returns t Allowances ).
Enter G(o) to return to year-selecting screen.
Enter M(ore) to display more items for this year.
8
8. Please enter Total Tax
(in Thousands)
(Current Value - 8.00, press ENTER to retain it)
80
The following 1990 data have been entered (in Thousands):
1. Gross Receipts or Sales Less Returns & Allowances 170.00
2. Interest Expense 32.00
3. Depreciation 45.00
4. Depletion 0.00
5. Taxable Income Before Net Operating Loss 200.00
6. Net Operating Loss Deductions 0.00
7. special Deductions 0.00
8. Total Tax 80.00
9. Credit from Regulated Investment Companies 0.00
Enter the number of the value you wish to change (e.g. enter 1 to change
Gross Receipts or Sales Less Returns t Allowances ).
6.16 September 1991
-------
tnter G(o) to return to year-selecting screen.
Enter M(ore) to display more items for this year.
M
The following 1990 data have been entered (in Thousands):
10. Credit for Federal Tax on Fuels 80.00
11. Cash 80.00
12. Trade Notes & Accounts Receivable Less Bad Debts 120.00
13. Inventories 300.00
14. U.S. Government Obligations 40.00
15. Tax-Exempt Securities 0.00
16. Other Current Assets 60.00
17. Accounts Payable 50.00
18. Mortgages, Bonds Payable in Less Than One Year 130.00
Enter the number of th'i value you wish to change (e.g. enter 10 to change
Credit for Federal Tax on Fuels ).
Enter G(o) to return to year-selecting screen.
Enter M(ore) to display more items for this year.
Enter B(ack) to display previous screen.
G
Which year of data would you like to review?
Select:
1. 1990
2. 1989
3. 1988
G. Go on to Phase I results
G
ABEL is ready to begin Phase I output.
Please enter a carriage return to continue.
Firm's Name: ABC CORPORATION Date: JULY 31, 1991
HISTORICAL FINANCIAL RATIOS
1990
1989
1988
Debt to Equity
0.34
0.32
0.33
Current Ratio
3.00
3.22
2.95
Times Int. Earned
7.25
10.68
14.33
Beaver's Ratio
0.81
0.80
1.04
Altman Z1-Score
2.78
3.13
2.93
3SSS339SSCfi3S3»W
:es3csanvBBBxe
rsssasxeasss
ssesss:
Do you wish to see detailed explanations of these ratios?
(Y = Yes, N * No, go directly to Phase I conclusions)
Please enter choice:
Y
1990 1989 1988
Debt to Equity 0.34 0.32 0.33
The debt to equity ratio (D/E) is defined as the firm's
6-17
September 1991
-------
total liabilities divided by its stockholders' equity.
This ratio measures the degree to which debt constitutes
the company's financing.
A D/E less than 1.5 but greater than or equal to zero generally
indicates that a firm has additional debt capacity. This firm's
D/E fell into this category in 1990, 1989, 1988.
Enter a carriage return to continue with individual ratio analysis.
1990 1989 1988
Current Ratio 3.00 3.22 2.95
The current ratio (CR) is defined as the firm's current
assets divided by its current liabilities. The ratio
assesses whether the firm will be able to cover its
short-term debts using cash and other current assets
which can be easily liquidated.
A CR greater than 2.0 generally indicates that a firm has good
liquidity. This firm's CR was strong in 1990, 1989, 1988.
Enter a carriage return to continue with individual ratio analysis.
1990 1989 1988
Times Int. Earned 7.25 10.68 14.33
The times interest earned ratio (TIE) is defined as the
firm's earnings before interest and taxes divided by its
interest expense payments. This ratio indicates how easily
the firm can pay the interest expense on its debt.
A TIE greater than 2.0 generally indicates that the firm is able to
meet its interest payments. This firm fell into this
category in 1990, 1989, 1988.
Enter a carriage return to continue with individual ratio analysis.
1990 1989 1988
Beaver's Ratio 0.81 0.80 1.04
Beaver's ratio (BR) is defined as the firm's after-tax
cash flow divided by its total liabilitites. The BR
provides a useful measure for predicting a firm's long-
term solvency and likelihood of staying in business. In
particular, the BR indicates whether the firm's internally
generated cash flow is sufficient to meet its current and
long-term financial obligations.
A BR greater than 0.20 generally indicates that the firm is solvent
and healthy. This firm fell into this category in
6-18
September 1991
-------
1990, 1989, 1988.
Enter a carriage return to con\. - e with individua'
-------
5. Enter the non-depreciable but tax-deductible capital costs associated with
the new investment in Thousands (e.g., site clean-up compliance costs)
followed by year-Jollars separated by a blank space (e.g., 30000 1989) . Enter
zero if this cost category is not applicable.
0
6. Enter the annual costs of the pollution control activity in Thousands
(e.g., operating and maintenance costs) followed by year-dollars separated
by a blank space (e.g., 30000 1989). Enter zero if there are no annual
costs.
5 1991
Would you like to review your penalty & pollution control cost inputs?
(Y=yes, N=No)
You have entered the following Phase II data (in Thousands):
Value
Year-
dollars
1. Investment or penalty payment year
2. Lump-sum settlement penalty
3. Depreciable capital cost
4. Non-depreciable, non-tax-deductible capital costs
5. Non-depreciable, tax-deductible one-time costs
6. Annual costs
1991
250.
1991
50.
1990
0.
1991
0.
1991
5.
1991
Enter the number of the item whose value you want to change, or type G to
Go on with Phase II analysis. For example, to change the value for the
Investment Year, type 1.
6. Enter the annual costs of the pollution control activity in Thousands
(e.g., operating and maintenance costs) followed by year-dollars separated
by a blank space (e.g., 30000 1989). Enter zero if there are no annual
costs.
(Current values are 5.00 1991)
5 1990
You have entered the following Phase II data (in Thousands):
Value
Year-
dollars
1. Investment or penalty payment year
2. Lump-sum settlement penalty
3. Depreciable capital cost
4. Non-depreciable, non-tax-deductible capital costs
5. Non-depreciable, tax-deductible one-time costs
6. Annual costs
1991
250.
1991
50.
1990
0.
1991
0.
1991
5.
1990
Enter the number of the item whose value you want to change, or type G to
Go on with Phase II analysis. For example, to change the value for the
Investment Year, type 1.
ABEL uses the following standard values in Phase II:
6-20
September 1991
-------
!• Reinvestment Rate
2. Marginal Income Tax Rate (%)
3. Annual Inflation Rate (%)
4. Discount Rate (%)
5. Weignted Average Smoothing Constant
Do you wish to have any of these items explained? (Y=yes, N=no)
Do you wish to change any of these items? (Y=yes, N=no)
0.0
= 38.5
4.4
- 12.1
0.3
ABEL can now analyze the ability of ABC CORPORATION
to pay for pollution control expenditures and a penalty.
Enter a carriage return when you are ready for the ABEL SUMMARY ANALYSIS.
CASE: ABC CORPORATION
Prob-
ab^ _-_y
(1)
50*
60%
70%
80%
90%
95%
99%
Total ABEL
Cash Flow
Generated
(2)
1141.
1099.
1051.
987.
867.
644.
0.
ABEL SUMMARY ANALYSIS
Date: JULY 31, 1991
ABEL Cash Flow
Net of Pollution
Control
Expenditures
(3)
1087.
1045.
998.
934.
814 .
591.
0.
Units: Thousands
ABEL Cash Flow
Net of P.C.
Expenditures
& Penalty
(4)
837.
795.
748.
684.
564.
341.
0.
ABEL projects that there is a 96.0% probability that ABC CORPORATION
can finance a penalty of $ 250, a total initial pollution control
investment of $ 52, and annual pollution control expenses of
$ 5 through the funds the company generates over the next five
years. All figures are expressed in Thousands and 1991 year-dollars.
Press return to continue with Phase II analysis
Would you like an explanation of any of the information in the ABEL SUMMARY
ANALYSIS? (Y-yes, N-no)
N
What further Phase II analysis would you like?
1. Calculate the annual penalty amount for a penalty which
is to be spread over more than one year.
2. ABEL'S evaluation of historical cash flows.
3. A more detailed version of the ABEL SUMMARY ANALYSIS.
4. Modify Phase II input values.
5. None of the above. Proceed to ABEL Output Menu.
£. ^ 1
^nMmh^r 10O f
-------
Rather than paying a single lunp-sun penalty at the beginning of 1991
ABC CORPORATION could spread payment of that penalty over several yea
in equal installments. The first installment would occur in 1991
and the remaining installments would occur at the same tine in each of
t!*e following years.
Over how many years would you like to spread the penalty?
(Select an integer value greater than 1 and less than or equal to 5.)
5
A lump-sum settlement penalty of $ 250000. (expressed in 1991
dollars) is exactly equal to 5 years of annual payments of $ 62020
What further Phase II analysis would you like?
1. Calculate the annual penalty amount for a penalty which
is to be spread over more than one year.
2. ABEL'S evaluation of historical cash flows.
3. A more detailed version of the ABEL SUMMARY ANALYSIS.
4. Modify Phase II input values.
5. None of the above. Proceed to ABEL Output Menu.
ABEL is ready to present an analysis of historic cash flows for
ABC CORPORATION . Enter a carriage return when you are ready.
ABEL'S HISTORICAL CASH FLOWS ANALYSIS
CASE: ABC CORPORATION Date: JULY 31, 1991 Units: Thousands
Inflation-Adjusted
Year Pre-tax Cash Flow Pre-tax Cash Flow
1990 325. 339.
1989 342. 373.
1988 445. 506.
Would you like an explanation of ABEL'S HISTORICAL CASH FLOW ANALYSIS?
(Y«yes, N»no)
N
What further Phase II analysis would you like?
1. Calculate the annual penalty amount for a penalty which
is to be spread over more than one year.
2. ABEL'S evaluation of historical cash flows.
3. A more detailed version of the ABEL SUMMARY ANALYSIS.
4. Modify Phase II input values.
5. None of the above. Proceed to ABEL Output Menu.
Following is a more detailed version of the ABEL SUMMARY ANALYSIS. Enter
6-22
September l»9l
-------
a carriage return when you are ready.
DETAILED ABEL SUMMARY
ANALYSIS
:ASE: ABC
CORPORATION
Date:
JULY 31,
1991
Units: Thousands
Initial
Annual
ABEL Cash Flow
Total ABEL
Pollution
Pollution
Net of Pollution
Prob-
Cash Flow
Control
Control
Control
ability
Generated
Cash
Flow
Cash Flow
Expenditures
50%
1141.
40.
14.
1087.
60%
1099.
40.
14.
1045.
70%
1051.
40.
14 .
998.
80%
987.
40.
14.
934.
90%
867 .
40.
14.
814.
95%
644 .
40.
14.
591.
99%
0.
40.
14.
0.
:KS&SS=SaE3S=3SSSSK
sccssc=ccsaEB&t:3XKs:=>
Press enter to continue with the DETAILED ABEL SUMMARY ANALYSIS
Which column of the DETAILED ABEL SUMMARY ANALYSIS would you like
explained in more detail?
1. Probability
2. Total ABEL Cash Flow (C.F.) Generated
3. Initial Pollution Control C.F.
4. Annual Pollution Control C.F.
5. ABEL C.F. Net of P.C. Expenditures
6. None. I want to proceed with the Phase II analysis.
6
What further Phase II analysis would you like?
1. Calculate the annual penalty amount for a penalty which
is to be spread over more than one year.
2. ABEL's evaluation of historical cash flows.
3. A more detailed version of the ABEL SUMMARY ANALYSIS.
4. Modify Phase II input values.
5. None of the above. Proceed to ABEL Output Menu.
ABEL Output Menu:
Select the data inputs and ABEL results you want saved in a file for
printing from the following:
1. Phase I and Phase II Inputs. Entire Phase I and Phase II Results.
2. Phase E and Phase II Inputs. Phase I and Phase II Summary Results.
3. Phase I Inputs. Entire Phase I Results.
4. Phase II Inputs. Entire Phase II Results.
5. None. Proceed with the program.
1
... Generating Phase I and Phase II outputs ...
6-23
September 1991
-------
You have now generated a file that contains your output.
After concluding this ABEL session, you will be given the
option of receiving a hard copy of this output.
How would you like to proceed with your ABEL analysis of ABC CORPORATION
1. Modify Phase I input values.
2. Clear data inputs; evaluate a different case.
3. Conclude this ABEL session.
3
Do you want to save your inputs (Y=yes,N=no)?
y
Please enter the name of the file in which you would like to save your
inputs. Enter a carriage return to cancel.
ABCCORP.ABL
Do you want to save your inputs (Y=yes,N=no)?
y
Please enter the name of the file in which you would like to save your
inputs. Enter a carriage return to cancel.
ABCCORP.ABL
ALL OF YOUR OUTPUT HAS BEEN SAVED IN A FILE.
DO YOU WISH TO RECEIVE A PRINTED COPY OF THIS OUTPUT?
(Y=YES, N=NO)
N
READY
6-24
September 1991
-------
Appendix A
ABEL DATA ENTRY FORMS
September 1991
-------
ABEL DATA ENTRY FORMS
ABEL is constructed to allow you to enter data from tax form 1120. tax form 1120-A. or the
A£EL data entry forms. Some users may find it easier to organize the accessary data on the data
entry forms before running the ABEL program, as the data forms are arranged in the same order as
the inputs in the ABEL model.
In this appendix, we provide the necessary information for converting tax form data to the
data entry forms. Because the tax forms are not the same from 1984 to 1990, it was necessary to
generate five different data entry forms, three for use with form 1120 and two for use with form
1120-A. The forms are attached as follows:
o Exhibit A-l: ABEL Data Entry Form 1, for use with tax form 1120, 1984-
1987;
o Exhibit A-2: ABEL Data Entry Form 2, for use with tax form 1120, 1988;
o Exhibit A-3: ABEL Data Entry Form 3, for use with tax form 1120,1989 and
1990;
o Exhibit A-4: ABEL Data Entry Form 4, for use with tax form 1120-A. 1984-
1988; and
o Exhibit A-5: ABEL Data Entry Form 5, for use with tax form 1120-A, 1989
and 1990.
A-l
September 1991
-------
In addition to these data entry forms, two additional forms have been included in this
appendix. These forms list the background information needed to run Phase 1 and key additional
inputs to run Phase II:
o Exhibit A-6: ABEL Data Entry Form 6, for background information used in
Phase 1 analysis; and
o Exhibit A-7: ABEL Data Entry Form 7, for key inputs needed to complete
Phase II analysis.
A-2
September 1991
-------
Exhibit a-I
ABEL DATA ENTRY FORM 1: 1984-1987 FORM 1120
Fill in data year
1 DATA ENTRY FORM FOR 1984-1987 TAX FORM 1120 |
| 1. Gross Receipts or Sales Less Returns and Allowances (Line lc) j
| 2. Interest Expense (Line 18)
| 3. Depreciation (Line 20)
1 4. Depletion (Line 22)
| 5, Taxable Income Before NOL and Special Deductions (Line 28)
| 6. NOL Deductions (Line 29a)
| 7, Special Deductions (Line 29b)
1
8. Total Tax (Line 31)
9. Credit from Regulated Investment Companies (Line 32e)
10. Credit tor Federal Tax on Fuels (Line 32f)
II, Cash (Schedule L, Line 1)
12, Trade Notes and Accounts Receivable Less Allowance for Bad
Debts (Schedule L, Line 2a)
13. Inventories (Schedule L, Line 3)
14. U.S. Government Obligations (Schedule L. Line 4)
15. Tax-Exempt Securities (Not available on Form 1120 in 1987-84)
N/A
16, Other Current Assets (Schedule L, Line 5)
17. Accounts Payable (Schedule L, Line 15)
IS. Mortgages, Notes, Bonds Payable in Less Than One Year
j (Schedule L, Line 16)
| 19. Other Current Liabilities (Schedule L Line 17)
20. Loans from Stockholders (Schedule L Line 18) |
21. Mortgages, Notes, Bonds Payable in One Year or More
(Schedule L, Line 19)
22. Other Liabilities (Schedule L» Line 20)
23. Appropriated Retained Earnings (Schedule L, Line 23)
24. Unappropriated Retained Earnings (Schedule L Line 24)
25. Total liability and Stockholders* Equity (Schedule L, Line 26)
26. Income Recorded on Books not Included in Return
(Schedule M-l, Line 7)
Note: All Form 1120, Schedule L, entries should be taken from column (d), the right-most colons.
A-3 September 1991
-------
Exhibit A-2
ABEL DATA ENTRY FORM 2: 1988 FORM 1120
DATA ENTRY FORM FOR 1988 TAX FORM 1120
1988 VALUE |
1. Gross Receipts or Sales Less Returns and Allowances (Line lc)
2. Interest Expense (Line 18)
3. Depreciation (Line 20)
4. Depletion (Line 22)
j 5. Taxable Income Before NOL and Special Deductions (Line 28)
NOL Deductions (Line 29a)
7. Special Deductions (Line 29b) g
8. Total Tax (Line 31) |
9. Credit from Regulated Investment Companies (Line 320
10. Credit for Federal Tax on Fuels (Line 32g)
I' "ash (Schedule L, Line 1)
12. Trade Notes and Accounts Receivable Less Allowance for Bad
Debts (Schedule L, Line 2a)
13. Inventories (Schedule L, Line 3)
14. U.S. Government Obligations (Schedule L. Line 4)
15. Tax-Exempt Securities (Not available on Form 1120 in 1988)
N/A
16. Other Current Assets (Schedule L, Line 5)
17. Accounts Payable (Schedule L, Line 15)
18. Mortgages, Notes, Bonds Payable in Less Than One Year
(Schedule L, Line 16)
19. Other Current Liabilities (Schedule L, Line 17)
20 Loans from Stockholders (Schedule L, Line 18)
21. Mortgages, Notes, Bonds Payable in One Year or More
(Schedule L, Line 19)
22. Other Liabilities (Schedule L, Line 20)
23. Appropriated Retained Earnings (Schedule L, Line 23)
24. Unappropriated Retained Earnings (Schedule L, Line 24)
25. Total Liability and Stockholders' Equity (Schedule L, Line 26)
26. Income Recorded on Books not Included in Return
(Schedule M-l, Line 7)
|
Note All Form 1120, Schedule L, entries should be taken from column (d), the right-most column.
A-d
September 1991
-------
Exhibit A-3
ABEL DATA ENTRY FORM 3: 1989 AND 1990 FORM 1120
Fill in data year:
I DATA ENTRY FORM FOR 1989 AND 1990 TAX FORM 1120 J |
| 1. Cross Receipts or Sales Less Returns and Allowances (Line lc) J 1]
1 2. Interest Expense (Line 18)
3. Depreciation (Line 20)
4. Depletion (Line 22)
5. Taxable Income Before NOL and Special Deductions (Line 28) |
j 6. NOL Deductions (Line 29a) |
| 7. Special Deductions (Line 29b) |
| 8. Total Tax (Line 31)
J 9. Credit from Regulated Investment Companies (Line 32f)
j 10. Credit for Federal Tax on Fuels (Line 32g)
11. Cash (Schedule L, Line 1) |
12. Trade Notes and Accounts Receivable Less Allowance for Bad |
Debts (Schedule L, Line 2b)
13. Inventories (Schedule L, Line 3)
14. U.S. Government Obligations (Schedule L Line 4)
15. Tax-Exempt Securities (Schedule L, Line 5)
16. Other Current Assets (Schedule L, Line 6)
17. Accounts Payable (Schedule L, Line 16)
18. Mortgages, Notes, Bonds Payable in Less Than One Year
(Schedule L, Line 17)
19. Other Current Liabilities (Schedule L Line 18)
20. Loans from Stockholders (Schedule L. Line 19)
21. Mortgages, Notes, Bonds Payable in One Year or More
(Schedule L, Line 20)
22. Other Liabilities (Schedule L, Line 21)
23. Appropriated Retained Earnings (Schedule L, Line 24)
24. Unappropriated Retained Earnings (Schedule L. Line 25)
25. Total Liability and Stockholders' Equity (Schedule L, Line 27)
26. Income Recorded on Books not Included in Return
(Schedule M-l, Line 7)
1
Note: All Form 1120, Schedule L, entries should be taken from column (d), tbe right-most column.
A-5
September 1991
-------
i-xhibit A-4
ABEL DATA ENTRY FORM 4: I9S4-1988 FORM 1120-A
Fill in data year
DATA ENTRY FORM FOR 1984 1988 TAX FORM 1120-A
1
1. Gross Receipts or Sales Less Returns and Allowances (Line lc)
2. Interest Expense (Line 18)
3. Depreciation (Line 20)
4. Depletion (not available on Form 1120-A)
N/A
S. Taxable Income Before NOL and Special Deductions (Line 24)
6. NOL Deductions (Line 23a)
7. Special Deductions (Line 25b)
8. Total Tax (Line 27)
9. Credit from Regulated Investment Companies (Line 28f)
10. Credit for Federal Tax on Fuels (Line 28g)
11. Cash (Part II, Line 1)
12. Trade Notes and Accounts Receivable Less Allowance for Bad
Debts (Part 11, Line 2 minus Part II, Line 2a)
13. Inventories (Part II, Line 3) |
14. U.S. Government Obligations (Part 11, Line 4)
15. Tax-Exempt Securities (not available on 1988 Form 1120-A)
N/A
16. Other Current Assets (Part II, Line 5)
17. Accounts Payable (Part II, Une 12)
18. Mortgages, Notes, Bonds Payable in Less Than One Year
(not available on Form 1120-A)
N/A
| 19. Other Current Liabilities (Part II, Line 13)
J 20. Loans from Stockholders (Part II, Line 14)
1 21. Mongages, Notss, Bonds Payable in One Year or More
(Part II, Line IS)
22. Other Liabilities (Part II, Line 16)
23. Appropriated Retained Earnings (not available on Form 1120-A)
N/A
24. Unappropriated Retained Earnings (Pan II, Line 19) |
25. Total Liability and Stockholders' Equity (Part II, Line 21)
26. Income Recorded on Books not Included in Return
(Part III, Line 5)
1
Note: Ail Form 1120-A Part II entries should be taken from column (b), the right-most column.
A-6
September 1991
-------
Exhibit A-S
ABEL DATA ENTRY FORM 5: 1989 AND 1990 FORM U20-A
Fill in data year
f DATA ENTRY FORM FOR 1989 AND 1990 TAX FORM 1120-A
|
| 1. Gross Receipts or Sales Less Returns and Allowances (Line 1c)
| 2. Interest Expense (Line 18)
| 3 Depreciation (Line 20) |
II 4. Depletion (not available on Form 1120-A)
N/A
| 5. Taxable Income Before NOL and Special Deductions (Line 24)
6 NOL Deductions (Line 25a)
7. Special Deductions (Line 25b)
8. Total Tax (Line 27)
9. Credit from Regulated Investment Companies (Line 280
10. Credit for Federal Tax on Fueli (Line 28g) jj
11. Cash (Part II, Line 1) |
12. Trade Notes and Accounts Receivable Less Allowance for Bad j
Debu. (Part II, Line 2a minus Part II, Line 2b) j
13. Inventories (Part II, Line 3) §
14. U.S. Government Obligations (Part II, Line 4)
15. Tax-Exempt Securities (Part II, Line 5)
16. Other Current Assets (Part II, Line 6)
17. Accounts Payable (Pan II, Line 13)
18. Mortgages, Notes, Bonds Payable in Less Than One Year
(not available on Form 1120-A)
N/A
19. Other Current Liabilities (Part 11, Line 14>
20. Loans from Stockholders (Part II, Line 15)
21. Mortgages, Notes, Bonds Payable in One Year or More I
(Pan II, Line 16) |
21. Other Liabilities (Part II. Line 17) J
23. Appropriated Retained Earnings (not available on Form 1120-A) |
N/A
24. Unappropriated Retained Earnings (Pan II, Line 20) j
25. Total Liability and Stockholders' Equity (Part II. Line 22) |
26. Income Recorded on Books not Included in Return 1
(Pan III, Line 5) 1
Note All Form 1120-A Part II entries should be taken from column (b), the right-most column.
A-7
September 1991
-------
Exhibit A-«
ABEL DATA ENTRY FORM 6:
BACKGROUND INFORMATION FOR PHASE I ANALYSIS
ENTER THE FOLLOWING BACKGROUND INFORMATION ON YOUR CASE:
ITEM
INPUT
1. Name of Firm
2. Statute
3. Number of Yean of Data Available (1-5)
4. Most Recent Year Available (e.g., 1989)
Note: For all of the Phase I and Phase II data inputs, make sure all entries have consistent units
(e-g., thousands of dollars).
A-8
September 1991
-------
Exhibit A-7
ABEL DATA ENTRY FORM 7:
KEY VALUES FOR PHASE II ANALYSIS
ENTER THE FOLLOWING DATA FOR PHASE II ANALYSIS:
1 item
DOLLARS
YEAR
1 1. The year in which the company will be investing in
1 pollution control equipment, incurring clean up costs
| and/or paying a penalty (e.&, 1991).
Not
Applicable
8 2. The proposed lump-sum settlement penalty (e.g.,
1 100000). If there is no penalty, enter a zero.
Not
Applicable
3. The depreciable cost of pollution control
investment followed by year-end dollars (e.g., 60000
1989). The cost of land should not be included in this
figure. Enter zero if this cost category is not
applicable.
I 4. The non-depreciable, non-tax-deductible one-time
j costs (e-g., the cost of land) followed by year-dollars
J (e.g., 150000 1989). Enter zero if this cost category is
j not applicable.
5. The non-depreciable but tax-deductible one-time
costs (e.g, site clean-up compliance costs) followed
by year-dollars (e.g., 30000 1989). Enter zero of this
cost category is not applicable.
6. The annual costs of the pollution control activity
(e.g., operating and maintenance costs) followed by
year-dollars (e.g., 5000 1990). Enter zero if there are
no annual costs.
A-9
September 1991
-------
Appendix B
TECHNICAL APPENDIX
PHASE I FINANCIAL RATIO CALCULATIONS
PHASE II ABILITY TO PAY CALCULATIONS
-------
A. PHASE I FINANCIAL RATIO CALCULATIONS
1. Overview
The first section of this appendix presents the methodology used by ABEL to calculate the
five Phase I financial ratios. Exhibit B-l contains a list of (hese names and the associated line
numbers from Form 1120 (1990) and Form 1120-A (1990). All Phase I variables have the same
names here as are used in the actual ABEL computer code. The primary purpose of this appendix
is to aid users and financial analysts who seek detailed information regarding ABEL's financial ratio
calculations. Exhibit B-2 shows the variables derived by the computer program from the entered
values.
2. tQ EqvttY 8«t|9
Formulas':
nc TOTLIB
" EQUITY where
EQUITY » ASSETS - TOTLIB and
TOTLIB = ACTPAY + CDET + OCL + LST + LTD + OLIB.
Notes:
If ASSETS - TOTLIB, then ABEL prints "• , indicating that the ratio cannot be computed.
A Debt to Equity ratio of ******* indicates that stockholders' equity is zero, an extremely serious
financial condition.
1 All data for Phase I calculations come from the same year. This is different from the Phase II
calculations, described in Section II of Appendix B, which references data from different years.
SeptembT 1991
B-l
-------
Imam Variable
BXHmrr b-i
ABEL TAX-FORM INPUT VARIABLE NAMES ANO TAX RWM UNE NUMBERS
Variable DtfiaiUca
1990 r uns
ll»A
ACTPAY
Account* payable
L 16
II 13
ACTREC
Acoouau receivable leaa allowance (or bad defcta
I.2B
II-2A minus II-2B
ASSETS
Tout liabsktic* A stockholders' equity
L-27
II 22
BNC
InriTt nondtd on boot* but not oa retura
Ml:7
111-5
CASH
Caah
LI
III
CDET
Mort|afes, nw, bond* payable < 1 year
1.-17
Noae
CRFUL
Credit for Federal tax oa fuda
J2»
a*
CRREO
Credit froa refined hwesftat conpaaicr
32f
28f
DEPL
Dcpletioa deduction
22
None
DEPR
Depredtaioa deduct »•
20
20
FED
Government oMigatioaa
L 4
11-4
INTR
Interest cxpeue deduct km
18
18
INV
Inventories
13
II 1
LST
Loans (nw stockholder*
I. 19
II 15
LTD
Montage*, aotea, bonds payable > 1 year
L 20
II 16
NETSALES
Gruat safca leat return aad allowances
Ic
lc
OCL
Other curat Itabiluiea
L 18
11-14
OCR
Other caiTM Mill
L-6
ll-i
OLID
Other habiiitiea
L 21
II 17
REAPP
Appropriated retained ramtnp
L-24
Noae
REUNAPP
Unappropriated retained caraiap
L 25
11-20
TAX
Total taxes
31
27
TESEC
Tax-exempt securities
L 5
II 5
TIBNOL
Taaabte inane before NOL A special deduction
28
24
NOL
Net operating loss deduction
2VA
25A
SPDED
Special deduct tons
29B
25B
NcSea
User lo perform subtraction
Used for Phase II
tiled for Phase II
Notes:
1. All fodD 1120 Schedule L enlrio should be taken (rom column (d), the rightmost column All form 1120-A Pan II entries should be taken from column (b), ibe n(hi tmm column
2. T-6* rrien to line 6 of Schedule L of form 1120.
3. *11-1* refer* lo bae I of Pan II of form II20-A.
4 "M-1.7" trfen lo line 7 of Schedule M-l.
-------
EXHIBIT B-2
ABEL PHASE I DERIVED VARIABLE NAMES
Derived Variable
Variable Definition
Used In
AZS
AJtman's Z-Score
AZS
BR
Beaver Ratio
Beaver's ratio
CAS HAT
After-tax cash flow
Beaver's ratio
CR
Current ratio
Current ratio
CURAS
Total current assets
Current ratio, AZS
CURLIB
Total current liabilities
Current ratio, AZS
DE
Debt-equity ratio
DE ratio
EBIT
Earnings before interest and
TIE ratio, AZS
taxes
EQUITY
Stockholders' equity
DE ratio, AZS
RETEARN
Total retained earnings
AZS
TIE
Times interest earned ratio
TIE ratio
TOTLIB
Total liabilities
DE ratio, AZS, BR
WC
Working capital
AZS
B-3
frptemfrr
-------
3. Current Ratio
Formulas:
^ _ CURAS
CURLIB where
CURAS = CASH + ACTREC + INV + FED + TESEC + OCR and
CURLIB = ACTPAY + CDET + OCL
Notes:
If CURAS >=0 and CURLIB = 0, then the current ratio will be assigned a value of ••••••• for
that year. The value of CURAS will determine the category into which that year's current ratio will
be classified in ABEL's detailed explanations of the historic financial ratios:
o Those years for which CURAS = 0 and CURLIB =» 0 will be classified as
having a Current Ratio between 1.0 and 2.0.
o Those years for which CURAS > 0 and CURLIB = 0 will be classified as
having a Current Ratio greater than 2.0.
4. Tjtpes InftTOt Eaiffll RUfr
Formulas:
TIF - E®17
Into whcrc
EBIT > INTR + TIBNOL
Notes:
A value of "•••••" will be assigned to the Times Interest Earned ratio for those years in which INTR
= 0. A TIE of indicates that the firm had no interest expense in that year.
B-4
September 1991
-------
5. Beaver's Ratio
Formulas:
BR - CASHAT
TOTLIB where
CASHAT = TIBNOL - TAX + CRREG + CRFUL + DEPR + DEPL + BNC
Notes:
The above equation for after-tax cash flow (CASHAT) does not, strictly speaking, include all items
that affect cash flow. Not included are changes in non
-------
6. Altman's Z-Score*
Formulas:
AZS - (0.717 • Z,) ~ (0.847 » Z,) ~ (3.107 » Z,) ~ (0.420 • Z4) ~ (0.998 . Z,) where
~ _ CURAS - CURLIB
" ASSETS
7 _ REAPP ~ REUNAPP
^ " ASSETS
Z. - EBIT
^ " ASSETS
Z - EQUITY
4" TOTUB
Z. . NETSALES
^ " ASSETS
Notes:
If ASSETS = 0 or TOTLIB = 0, ABEL will assign that year's Altman's Z-Scorc (AZS) a value of
An AZS of indicates that a numerical value could not be computed for that year
because either total assets or total liabilities were equal to zero. Because these situations are
extremely unusual, ABEL will recommend that the user check the actual tax return against all Phase
I data inputs for that year before proceeding.
4Edward I. Altman, Corporate Financial Distress: A Complete Guide to Predicting. Avoiding
and Dealing with Bankruptcy. 1983, and "The Success of Business Failure Prediction Models",
Journal of Banking and Finance. Vol. 8. pages 171-198, June 1984.
B-6 September 1991
-------
B. PHASE II CALCULATIONS
1. Overview
This section presents ABEL's Phase II ability to pay calculations. ABEL discounts future
years' projected internally generated cash flows back to the date on which the firm will incur the
environmental expenditure. All after-tax cash flows associated with the pollution control activity and
penalty are subtracted out of these cash flows to estimate the funds that will remain after these
expenditures. If the present value of these net cash flows is greater than or equal to zero, the firm
is deemed able to pay for both the pollution control expenditures and the penalty. If ihe present
value is negative, however, the firm is deemed unable to fund the expenditures and/or penalty.
While the technique of discounting cash flows is well accepted by the financial community,
the actual implementation in this context is quite complex. To begin, there are seven main step*
involved in the Phase II ability to pay calculations:
1. Calculate the firm's pre-tax historic available cash flows;
2. Adjust the historic available cash flows for inflation;
3. Compute the mean and standard deviation of the historic inflation-adjusted
pre-tax available cash flows;
4. Estimate the firm's future available pre-tax cash flows;
5. Compute the present value of five years of the firm's future available after-tax
cash flows;
B-7
September 1991
-------
6. Compute the present value of five years of ihe after-tai cash flows associated
with the new (pollution control and penalty) expenditures; and
7. Compute the resulting net present value of all cash flows and adjust it for the
penalty payment.
2. Detailed Ability to Pav Calculations
As in Section A of this appendix, the variable names used in the following equations are the
same ones used in the ABEL computer code. Exhibit B-3 provides definitions of all Phase Q
variables, which are entered by the user (Input Variables). Exhibit B-4 defines all variables that have
values calculated by the program (Derived Variables). The following subscripts apply to all of the
variables used
-------
Step 1:
Calculate Pre-Tax Historic Available Cash Flow
The historic pre-tax available cash flow, XNCASHj, is calculated as:
XNCASHj = CAS HAT, + TAX, - [FTR2 . DEPR,J
where the reinvestment rate, FTR2, is assigned a standard value of 0.0 unless modified by the user
in the Phase II input section. Like the provided historical data, these calculations yield available cash
flow figures expressed in current (nominal) dollar terms.
Step 2: Adjust Available Cash Flows for Inflation
ABEL next converts the current dollar pre-tax historic available cash flows into inflation-
adjusted constant (real) dollars as of the base year (the year that the company will be making the
environmental expenditure and/or paying the penalty). This year is represented by the input variable
ITODAY. The equation is:
XCASHj - XNCASHj . [(1 + XINF,
-------
EXHIBIT B-3
Input Variable
ANN
ANNS
BNCj
CLEAN
CLEANS
COMPANY_NAME
CRFUL,
CRREG,
CURRENT_DATE
DEPL,
DEPR,
EQUIP
EQUIPS
FTR2
ITODAY
LAND
LANDS
MRY
NOLujry
NUMYRS
PENAL
SMOOTH
SPDED,
ABEL PHASE II INPUT VARIABLES
Variable Definition
Annual pollution control costs expressed in ANNS
The year-dollars of ANN
Income recorded on books but not on return
Nondepreciable but deductible one-time costs expressed in CLEANS
The year-dollars of CLEAN
Name of the company being analyzed
Credit for Federal tax on fuels (Phase I input)
Credit from regulated investment companies (Phase I input)
Date on which the user is performing the ABEL analysis
Depletion deduction (Phase I input)
Depreciation deduction (Phase I input)
Depreciable capital cost of new investment in EQUIPS
The year-dollars of EQUIP
Reinvestment rate (Standard Value = 0.0)
Year to which net present value and constant dollar calculations are made;
same as penalty payment/investment year
Nondepreciable, nondeductible one-time costs in LANDS
The year-dollars of LAND
Most recent year for which there are input data (from Phase I)
Net operating loss deduction (from Phase I) for most recent year of data
Number of years for which there are data (from Phase I)
Civil penalty expressed in (TODAY dollars
Smoothing constant used in weighted average (Standard Value = 0.3)
Special deductions (from Phase I)
B-10
September 1991
-------
EXHIBIT B-3
(continued)
ABEL PHASE II INPUT VARIABLES
Incut Variable
Variable Definition
TAX,
Toul Tax (Phase I input)
T1BNOL,
Taxable income before NOL & special deductions (from Phase I)
TXRT
Total marginal tax rate (Standard Value « 0.385)
XINF
Annual inflation rate (Standard Value - .044)
YRS
Number of years over which the penalty payment will be spread
B-ll
September 1991
-------
EXHIBIT B-4
ABEL PHASE II DERIVED VARIABLES
Derived Variable
Variable Definition
EQU1V
Annual equivalcm cash flow of CIVIL
ATFCF
After-tax future available cash flow in ITODAY dollars
AVCSH
Weighted-average value of XCASH,
CAPCST
Depreciable capital cost of new investment in ITODAY dollars
CAPND
Nondepreciable, nondeductible cost of new investment in ITODAY dollars
CARFOR
NOL carryforward expressed in ITODAY dollars
CASHS,
PTCASH, expressed in ITODAY constant dollars
CASHATj
After-tax cash (low (Calculated in Phase I for Beaver's ratio)
CASHAV
Simple average of CASHS. excluding most recent year
CHARGE^
PV of 5 years of ATFCF^,
EXPWT,
Weights used to calculate weighted average of historical cash flows
INC,
Pre-tax, pre-NOL deduction income in ITODAY dollars
INCAV
Weighted average of INC,
MACRS»
Percentage of CAPCST to be depreciated in year k
NOLIF
Number of years until NOL carryforward expended
NOLRD
NOLIF rounded to the nearest integer
NSD^j,
Number of standard deviations away from mean for probability prob
ONM
ANN expressed in ITODAY dollars
PBCSH^
Future pre-tax cash flow that will be equalled or exceeded with
probability prob
PBINC^
Future pre-tax pre-NOL-deduction income that will be equalled or exceeded
with probability prob
PENPRB
Probability of being able to afford the penalty amount
PTCASHj
Pre-tax, pre-reinvestment cash flow
B-12
September 1991
-------
EXHIBIT B-4
(continued)
ABEL PHASE II DERIVED VARIABLES
Derived Variable Variable Definition
PVCAP
Present value of initial capital investment
PVONM
After-tax present value of annual costs
PVTS
Present value of 5 years of T5*
SDCSH
Standard deviation of XCASH,
SDINC
Standard deviation of INC,
SMSUM
Scaling factor for weighted average
TAXES^
Taxes the company will pay in year k at probability prob
TS»
Total tax shield for new investment in year k
TXND
Nondepreciable but deductible cost of new investment in ITODAY dollars
VARCSH
Variance of XCASH,
XCASH,
Constant dollar 'available* pre-tax cash flow
XNCASH,
Current dollar "available* pre-tax cash flow
XNET^
Present value as of ITODAY of all cash flows
XNRATE
Nominal discount rate for the firm's cash flows
Notes: 1.
Subscript *j* indicates that the variable takes on a different value each year.
It is only used for historic data, j » 1 corresponds to the most recent year
for which there are data.
2
Subscript *k* also indicates that the variable takes on a different value each
year, but it is only used to refer to future yean, k - 1 corresponds to the
first future year, the year in which the company invests in new pollution
control equipment fsarne date as ITODAY).
3.
Subscript 'pro' dies that 'he variable's vaiue changes with the
probability i-./et. oi * hich the e seven.
B-13
September 1991
-------
Step 3: Compute Mean and Standard Deviation of Historic Constant Dollar Pre-Tax
Available Cash Flows
The equation for the weighted average of the constant dollar historic pre-tax available cash
flows, AVCSH, is:
NUtyYRS
AVCSH = £ (XCASH, . EXPWT,) where
i • i
EXFWT - SMOQTH * <1 ' SMOOTH)*'1
'" SMSUM
NUMYRS
and SMSUM = £ [SMOOTH • (1 • SMOOTH) 0 ")
i -1
The variance and standard deviation of the historic constant dollar pre-tax available cash flows
are computed using the following equations:
SDCSH - VARCSH 05 where
(XCASH, - AVCSH)2 « EXFWT. • NUMYRS
VARCSH - V - i '
pf NUMYRS- 1
B-14
IWl
-------
Step 4:
Estimate Future Available Pre-Tax Cash Flows
This equation calculates the constant dollar available cash flows that a firm can be expected
to generate in the future at different probability levels. We assume that the firm's total population
of all of its historic constant dollar available cash flows are normally distributed.
ABEL employs the T-distribution as the basis for estimating probabilities, because of the small
number of data points used in the calculations. In general, if a population is normally distributed,
then one can estimate the percentage of data points in the population that will exceed a particular
value by using a standard normal table. Even if we are only dealing with a subset of the entire
population, we can still use the standard normal table to estimate percentages (probabilities),
providing the sample is large enough, typically in excess of fifteen to thirty data points. When the
population is normally distributed but the sample size is very small, the T-distribution table is the
analytically correct approach for estimating probabilities. The T-distribution, also referred to as the
sampling distribution, has the same symmetrical bell-shaped curve as the normal distribution. It is
somewhat (latter and lower at the mean, however, as well as somewhat higher in the two tails than
the normal distribution.
The calculation of the future expected pre-tax cash flow, at each probability level, is calculated
as follows:
PBCSH^ = AVCSH - (SDCSH • NSD,^)
In this equation, the value of NSD^ is taken from the "look-up" table shown in Exhibit B-5. These
T-distribution values can be found in any statistics book; two books are listed in Exhibit B-S for
reference purposes.
B-15
September 1991
-------
Exhibit B-5 j
VALUE OF NSD^
Number of Years of Historic Data |
Probability
3
4
5 1
50%
0.000
0.000
0.000 1
1 60%
0.289
0.277
0.271 |
1 70%
0.617
0.584
0.969
80%
1.061
0.978
0.941
90%
1.886
1.638
1.533
95%
2.920
2.353
2.132
99%
6.965
4.541
3.747
Sources:
11. E Mansfield, Statistic* for Bminegi and Economics Third Edition.
W.W. Norton & Co., 1987, p. A16.
2. Pindyck & Rubinfcld, Econometric Modeli St Economic Forecasts. I
Second Edition, McGraw-Hill, 1981, p. 606. R
'
For example, the equation for the minimum pre-tax cash flow that we could expect to obtain
80% of the time, using five years of data, is:
PBCSHjot ¦ AVCSH - (SDCSH *0.941)
B-16
September 1991
-------
Step 5:
Compute Present Value of Future Available After-Tax Cash Flows
The present value of five years of expected future available after-tax cash flows for a given
probability level, designated as CHARGE^, is calculated from the following equation:
CHARGE^ - £ ATFC3' «
k-l
1 *XINF
1 ~XNRATE
k-O-J
where
ATFCF^ = PBCSH^ - TAXES^
In this equation ATFCFprotu represents the after-tax future available cash flow for year "k" and
probability level "prob". The vilue of this variable corresponds to constant ITODAY dollars, as can
be seen from Steps 2-4 above.
A number of comments ate necessary to clarify the previous set of equations:
o In the equation for CHARGE^ first we inflate ATFCF ., to nominal year
"k" dollars and then we discount that cash flow back to ITODAY using the
Grin's nominal discount rate. The calculation is made in this manner because
finance theory dictates that nominal cash flows be discounted at the nominal
discount rate and real cash flows be discounted at the real interest rate.
o The exponent in the equation for CHARGE^ uses half-years since the
company's annual cash flows are assumed to occur in the middle of each year.
This convention balances off cash flows which occur in the first half of the
year with those that occur in the second half of the year.
o XNRATE, the weighted average cost of capital, is an after-tax discount rate
and is applied to after-tax cash flows.
TAXESynM are calculated as follows. This calculation is complex since we must estimate the number
of yean before the most recent year's Net Operating Loss (NOL) carryforward is expended, and
calculate the amount of income on which taxes are based for the seven different probability levels.
B-17
September 1991
-------
Calculate historic pre-tax pre-NOL-deduction income in ITODAY dollars:
INC, « (TIBNOLj - SPDEDj) • (1 + XINF)
-------
Calculate the NOL carryforward, as of the end of the most recent year of
historic data, expressed in ITODAY dollars:
CARFOR = Minimum of 0 or
(TIBNOLmry - NOLMRV, - SPDEDmry) • (1 + XINF)(rroOAV MRY)
Note that the NOL carryforward is expressed as a negative number.
Calculate the number of years after the most recent year of historic data until
the NOL carryforward will be completely expended:
NOLIF - ~CARF0R where
INCAV
NOLRD m NOLIF rounded up/down to the nearest integer. Note that if
NOLIF is exactly 0, then NOLRD would also be exactly 0.
Use the decision rules shown in Exhibit B-6 to determine TAX*-S>inl l.
B-19
Seotcmbtr |»9I
-------
Exhibit B-6
DECISION RULES FOR CALCULATING FUTURE YEARS' TAXES
CARFOR
PBINC^
Decision Rule
> 0
Calculate TAXESpro6l = TXRT * PBINC,^ for all k.s
« 0
<= 0
TAXESprofcA = 0 for all k6
1 * 0
1
!
°
ll
V
TAXESprofck = 0 for all k7
< 0
> 0
The company will begin paying taxes after its NOL carryforward
has been expended.
a. If (k - 1 + ITODAY - MRY) < = NOLP.D, then
TAXESp(Ak=0.
b. If (k - 1 + ITODAY - MRY) > NOLRD, then
TAXES^k = TXRT • PBINC^.
The tax rates are based on marginal corporate tax rates taken from the Tax Reform Act of 1986 and
on 1989 state marginal tax rates taken from the 1990 - 1991 edition of The Book of the States.1
5 The company has no NOL carryforward and a positive taxable income at this probability level,
so must pay taxes in all years.
6 The company has no NOL carryforward but has negative taxable income at this probability level.
The company will not pay any taxes and will build up a NOL carryforward.
7 The company has a NOL carryforward and negative taxable income at this probability level.
The company will not pay any taxes and its NOL carryforward will grow in size.
* The inclusion of state taxes and use of the highest federal marginal tax rate results in a
conservative estimate of taxes for small firms with income less than $75,000.
B-20
September 1991
-------
Step 6: Compute Present Value of After-Tax Cash Flows Associated with New Capital
lavestment
There are three primary components to a new pollution control capital investment that affect
after-tax cash flow; the original capital investment, the depreciation and deduction tax shields
associated with the investment (corresponding to EQUIP and CLEAN, respectively), and the annual
operating expenses. The equation for the present value of Ave years of after-tax cash flows for each
of these is developed below.
a. Calculate the present value of the initial capital investment, denoted by
PVCAP, as of the beginning of ITODAY
PVCAP = -CAPCST - CAPND - TXND
The initial capital investment consists of a single cash outflow at the beginning
of ITODAY, and consists of three parts:
CAPCST is the constant dollar depreciable capital coat of the new
pollution control investment
CAPND is constant dollar nondepreciable, non-tax-deductible one-
time costs of the new investment.
TXND is the constant dollar nondepreciable but tax deductible capital
one-time costs.
B-21
September 1991
-------
Since the above capital cost cash flows all occur at the beginning of year
ITODAY, there is no need to discount them; they already represent present values.
To obtain the constant ITODAY-dollar capital costs, however, we need to adjust the
user-entered capital costs:
CAPCST = EQUIP . (1 + XINF),rrODAY EOU,™>
where EQUIP is the user-provided CAPCST expressed in year EQUIPS
dollars.
CAPND = LAND . (I + XINF)
where CLEAN is the user-provided TXND expressed in year CLEANS
dollars.
b. Calculate the present value of the tax shields, PVTS, associated with the initial capital
investment, as of ITODAY
There are two sources of tax shields corresponding to the initial pollution
control capital investment, both of which serve to reduce taxes and thereby increase
cash Dow. The two sources are the depreciation tax shields associated with CAPCST
and the nondepreciable but tax deductible items, represented by TXND, that are
written off for tax purposes in year ITODAY.
In order to be consistent with the Tax Reform Act of 1986 and the July 1990
venion of BEN, CAPCST will be depreciated under the Modified Accelerated Cost
Recovery System (MACRS). MACRS calls for the use of double declining balance
(DDB) depreciation with half-year convention, a seven year life, and a switch from
B-22
September 1991
-------
DDB to (he straight line method in the fifth year. The switch is made in the year
depreciation equals or exceeds that determined under DDB in order to maximize the
depreciation deduction.
The total depreciation and deduction tax shield for the year in which the
investment is made (i.e., k = 1) is:
TSk., = TXRT • [(CAPCST * .14286) + TXND)
where the value of .14286 is taken from a MACRS depreciation schedule.*
For years k=2 to 5. the total tax shield consists solely of the depreciation tax
shield and is given by the fomula:
TSk = TXRT * CAPCST * MACRSk
where MACRSk is taken from the following table:10
k
MACRSk |
2
0.24490 |
>
0.17493 |
4
0.12495 |
5
0.08925 |
9 For example, refer to p. 307 of the 1990 U.S. Master Tax Guide.
10 Ibid.
B-23
-------
The present value as ol ITODAY of five years of the tax shields associated
with the initial capial investment is given hv:
PVTS - £
TSk
fct (1 * XNRATE)* 0 5
Note that it is not appropriate to inflate the tax shields to current dollars before
discounting them since the actual depreciation in any year is a fixed dollar amount, and is thus
already in each year's current dollars. Also, we use the weighted average cost of capital as
the discount rate since it incorporates the firm's overall risk level. Finally, the exponent in
the equation for PVTS uses half-years since tax shields increase cash flow and the company's
annual cash flors are assumed to occur in the middle of each year, as discussed previously.
c. Calculate the present value of the after-tax annual cash flows, PVONM, as of
ITODAY
PVONM - - OHM • (1
TXRT). £
k-l
I + XINF
k-OJ
1 * XNRATE
where ONM represents the annual expense (ANN), expressed in ITODAY dollars.
B-24
September 1991
-------
The value provided by the user for this expense must, however, first be
converted into ITODAY dollars:
ONM = ANN * (1 + xiNF),rroDAY •ANN1'
where ONM is the user-provided ANN expressed in year ITODAY dollars.
The above equation for the present value of annual expenses assumes that
these expenses escalate at the inflation rate and that they occur in the middle of the
year. The weighted average cost of capital is again used as the discount rate.
Step 7: Compute Resulting Net Present Value of Five Years of After-Tax Future Cash Flows
for All Probability Levels
XNET^ » CHARGE^ + PVONM + PVTS + PVCAP
where XNET^ represents the present value, as of the beginning of ITODAY, of five yean
of net after-tax cash flows available to the firm for discretionary uses.
Note that this does not mean that the firm will have enough cash on hand as of ITODAY
to make a lump sum penalty payment equal to XNET^. If the firm's current financial position is
strong, however, as determined in Phase I. and XNET is sufficiently large with, say an 80%
confidence level, then ABEL assumes that the firm would be able to obtain additional debt or equity
financing sufficient to pay a lump sum penalty of that amount.
Step t: Coarert the Penalty into an Annual Equivalent Cash Flow
Rather than paying a single lump-sum penalty at the beginning of ITODAY, the government
may wish to allow a company to spread payment of that penalty over several yean in equal
installments. The fint installment would occur during ITODAY and the remaining installments would
occur at the same time during each of the following years.
B-25
September 1991
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If this option is chosen in the output section, the user will be asked for the number of years
over which to spread the penalty payment (YRS) at that time. The annual installment amount is:
EQUTV - 9YS:
YTU-I ,
!~ T !
ft (1 ~ XNRATE)k
where CIVIL is the penalty input as PENAL in ITODAY dollars.
Note that this annual installment is already expressed in current dollar terms since the equation was
derived by discounting nominal cash flows at the firm's nominal interest rate. It also assumes that
the initial payment is paid as of ITODAY.
Step 9: Calculate the Probability Level Associated with the Penalty Amount Using Linear
Interpolation
ABEL will have previously computed the values in the right hand column of the following
table:
Probability
Value
50%
60%
XNET^.^
70%
XNk ' prot-70%
80%
XNET^.«
90%
95%
| 99%
XNET^.^
B-26
September 1991
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A computer algorithm calculates the probability level associated with a given penalty amount, as
follows:
1. Determine the two consecutive values in the right column of the above table
between which CIVIL falls.
2. Perform a linear interpolation to determine the probability level associated
with CIVIL. Assign that probability level as a string to the variable
PENPRB."
3. If the numerical value of PENPRB < 60% then set PENPRB equal to the
string "less than 50".
4. If the numerical value of PENPRB > 99%, then set PENPRB equal to the
string "99+".
11 For example, if XNET^.m* = 100. XNET^.^ = 70. and CIVIL = 80, then PENPRB
» 90 - (90 - 80) * [(80 - 70) ~ (100 - 70)J = 86.7 86.7 would then be converted to the string
"86.7".
September 1991
B-27
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Appendix C
USING ALTERNATIVE FEDERAL TAX FORMS
September 1991
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USING ALTERNATIVE FEDERAL TAX FORMS
To this point in the manual, all of ABEL's income statement and balance sheet data
requirements have been taken from a firm's corporate tax returns, either Form 1120 or 1120-A.
ABEL is sufficiently flexible, however, to utilize other federal tax returns, such as Form 1120-S, Form
1065, and the sole proprietorship form. The use of these forms in ABEL is discussed below.
Additional information on evaluating non-corporate entities is contained in the ABEL User's Guide.
If ABEL indicates an inability to pay, you should pursue further analysis of the entity and its ownen.
A. looming Data from Form 1120-S and Form 1065
1. General Information
Both Phase I and Phase II of ABEL can be run with federal tax return Forms 1120-S and
1065. These forms correspond to S-corporations and partnerships, respectively.1 Exhibits C-l and
C-2 provide the line numbers on the tax forms that correspond to the necessary ABEL inputs for
these two tax forms, respectively. Note that because the tax forms change from year to yeai, you
must be careful to match the appropriate line number to the appropriate year of the form.
You should pay special attention to the directions in Exhibit C-2 when using Form 1065. In
some instances a partnership filing Form 1065 may have rental income from properties it owns. In
certain years rental income and expenses are shown in a separate section of the tax form (Schedule
H), and are not included in the 'Ordinary income (loss) from trade or business activity(ies)".2 You
' One of the characteristics of a corporation is that the owners' liability for corporate debts are
limited to corporate property. S-corporations differ from regular corporations (i.e. "C-corporations"
which Gle tax Form 1120 or 1120-A) in that the S-corporation passes all expenses and income on
through to the owners. The owners then report the expenses and income on their personal income
taxes. In contrast, a C-corporation pays income tax and the owners also pay income tax on any
income received from the corporation (e.g. dividends, or salary). A partnership is similar to a S
corporation except that the owners are liable for any debts of the partnership. A "general partner"
can be personally liable, while limited partners' exposure is limited to their investment.
2 In addition, all income and expenses resulting from rental properties are usually detailed in
schedules attached to the tax return.
C-l
September 1991
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should be sure to include all rental income and expenses when evaluating the partnership's ability to
pay. Exhibit C-2 provides guidance on how to include these figures.
2. The Calculatioo of Total Taxes
One problem that you will encounter in using either of these tax forms involves the
calculation of taxes paid by the organization. In fact, both S-corporations and partnerships pass
income and expenses through to the owners, who then pay taxes on the net income from all of their
business activities. There are two issues related to taxes: (1) the amount of tax the organization has
historically paid; and (2) the marginal tax rate to apply to ABEL's projection of future cash flows.
As indicated in Exhibit C-l and C-2, we recommend you use zero for total tax (data item #8).
This may overestimate historical cash flows, if the owner is paying substantial taxes. On the other
hand, frequently owners pay little or no taxes due to the nature of their taxable income and expenses.
To calculate after-tax cash flows in Phase II, it is necessary to specify the marginal tax rate.
The current default value in ABEL is 38.5%, which reflects the federal and state marginal rates for
corporations. For the purposes of an S-corporation or a partnership, we recommend you use the
individual marginal federal rate at th : upper end of the income scale as the default value. In 1991,
the highest marginal rate is 31 percent. Alternatively, you could determine the appropriate marginal
rate by using the net taxable income of a typical shareholder in the S-corporation or the typical
partner in the partnership.
B. Sole Proprietorship
Sole proprietors provide information on business income and expenses on Schedule C of
Form 1040. Unlike C-corporations, S-corporations or partnerships, however, sole proprietors are not
required to supply any information on the assets and liabilities (the "balance sheet") of the business.
Therefore, ABEL cannot calculate any financial ratios, because of the lack of balance sheet
information.
C-2
September 1991
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ABEL can estimate historical cash flows generated by the business, make a projection of
future cash flows, and then predict the business's ability to support penalty payment or pollution
control investment. Exhibit C-3 provides the line numbers corresponding to the ABEL inputs for
the Sole Proprietorship form. As for partnerships and S-corporations, you should use a marginal tax
rate equity to the marginal rate paid by the sole proprietor (the highest rate in 1991 was 31 percent).
The user should take special care in evaluating sole proprietorships, however, especially when
ABEL shows that the business cannot afford to pay. In particular, the sole proprietor's non-business
income and assets are also available to pay for a penalty or pollution control costs. At the same time,
you should be aware that the income tax form does not list all of an individual's minimum expenses
(rent, debt payments, etc). In short, if the business cannot support a penalty payment, you should
request additional information on the proprietor's living expenses, assets and liabilities. Additional
information on evaluating a sole proprietorship can be found in the ABEL User's Guide.
Note that ABEL should only be run on active sole proprietorships. If the business is no
longer operating, then you must assume it can not pay a penalty. The individual's financial situation
must then be evaluated.
C-3
September 1991
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Kxhibit C-l
DATA LOCATIONS ON FORM 1120S
Data Item
Location on ]
Form 1120 S |
(S Corporation)
1.
Gross Receipts or Sales Less
Returns and Allowances
1990: Sum cf lc, K-/»a, and total gross rental
income from Form 8825, line 17
1987-1989: Sum of lc, K-2a anc K-3a
1984-1986: Sum of lc, 5 and 6
2.
Interest Expense
1990: Sum of 13, interest expense from
schedule for K-3b, and from Form
8825, sum of line 9 for all properties
1987-1989: Sum of 13, interest expense from
schedule for K-2b and K-3b
1984-1986: 16a
I 3
Depreciation
1990: L-lOb — Co'.(c) minus Col.(a)1
1989: L-lOa -- Col.(c) minus Col.(a)
1984-1988: L-9a -- Col.(c) minus Col.(a)
4.
Depletion and Amortization
1990: L-llb - Ol.(c) minus Col.(a); plus L-
13b -- Col.(c) minus Col.(a)2
1989: L-lla -- Col.(c) minus Col.(a); plus L-
13a — Col.(c) minus Col.(a)
1984-1988: L-lOa - Col.(c) minus Col.(a); plus
L-12a - Cc .(c) minus Col.(a)
5.
Taxable Income Before NOL
and Special Deductions
1990: K-20
1987-1989: Sum of K-l, K-2c, K-3c, K-4a to K-4f,
K-5 and K-6; minus sum of K-7 to K-
10
1984-1986: Sum of K-la-d, K-2 to K-6; minus sum
cf K-7 to K-11
6.
NOL Deductions
NA., use 0
7.
Special Deductions
NA., use 0
&
Total Tax
1987-199> ¦: 22c
1984-19^6 25c
September 1991
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Data Item
Location on 1
Form 1120S
(S Corporation) J
I 9.
Credit From Regulated
Investment Companies
NA.. use 0
| 10.
Credit For Federal Tax on
Fuels
1990: 23c
1987-1989: 23b
1984-1986: 26b
1 U
Cash
L-l. Col.(d)
I 12'
Trade Notes and Accounts
Rec. Less Allowance for Bad
Debts
1990: L-2b, Col.(d)
1984-1989: L-2a, Col.(d)
13.
Inventories
L-3, Col.(d)
I4.
U.S. Government Obligations
L-4. Col.(d)
15.
Tax-Exempt Securities
1989-1990: L-5, Col.(d)
1984-1988: NA., use 0
16.
Other Current Assets
1989-1990; L-6, Col.(d)
1984-1988: L-5, Col.(d)
17.
Accounts Payable
1989-1990; L-l6, Col.(d)
1984-1988: L-15, Col.(d)
18.
Mongages, Notes, Bonds
Payable in Less Than One
Year
1989-1990: L-17, Col.(d)
1984-1988: L-16, Col.(d)
19.
Other Current Liabilities
1989-1990; L-18, Cot.(d)
1984-1988: L-17, Col.(d)
20.
Loans From Stockholders
1989-1990: L-19, Col.(d)
198-1 1988: L-18, Col.(d)
21.
Mortgages, Notes, Bonds
Payable in One Year or
More
1989-1990: L-20, Col.(d)
1984-1988: L-19, Col.(d)
22.
Other Liabilities
1989-1990: L-21, Col.(d)
1984-1988: L-20, Col.(d)
23.
Appropriated Retained
Earnings
1990: L-24, Col.(d)
1989: Sum of L-28 and L-29, Col.(d)
1986-1988: Sum of L-27 and L-28, Col.(d)
1984-1985: L-23. Col.(d)
C-5
September 1991
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Data Item
Location on
Form 1120 S
(S Corporation)
24.
Unappropriated
Retained Earnings
1986-1990: NA., use 0
1984-1985: L-24, Col.(d)
25.
Total Liability and
Stockholder's Equity
1990: L-26, Col.(d) j
1989: L-30, Col.(d)
1984-1988: L-29, Col.(d)
26.
Income Recorded on Books
not Included in Return
1990: M-l, line 5 j
1984-1989: NA., use 0 |
1 Note that this is a si ~rt-cut method that, in some situations, may slightly understate total
depreciation deducted.
2 Note that this is a short-cut method that, in some situations, may slightly understate total depletion
and amortization taken.
C-6
September 1991
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Exhibit C-2
DATA LOCATIONS ON FORM 1065
Data Item
Location oe Form 1065
(Partnership)
1.
Gross Receipts or Sales Less
Returns and Allowances
1990; Sum of lc, gross income from
schedule for 4 and 5, and total
gross rental income from Form
8825, line 17'
1987-1989: Sum of lc, gross income from
schedule for 4 and 5, and sum of
H-2 for all properties
1984-1986: Sum of lc, 6c and gross income
from schedule for 4, 7 and 8
2.
Interest Expense
1990: Sum of 12, interest expense from
schedule for 4 and 5, and from
Form 8825, sum of line 9 for all
properties1
1987-1989: Sum of 12, interest expense from
schedule for 4 and 5, and sum of
H-9 for all properties
1984-1986: Sum of 15a, interest expense
from schedules for 4, 6, 7 and 8
3.
Depreciation
1990: L-9b -- Col.(c) minus Col.(a)1
1989: L-8b - Col.(c) minus Col.(a)
1984-1988: L-8a -- Col.(c) minus Col.(a)
4.
Depletion and Amortization
1990: L-lOb - Col.(c) minus Col.(a);
plus L-12b -- Col.(c) minus
Col.(a)4
1989: L-9b - Col.(c) minus Col.(a);
plus L-llb -- Col.(c) minus
Col.(a)
1984-1988: L-9a -- Col.(c) minus Col.(a);
plus L-lla - Col.(c) minus
Col.(a)
5.
Taxable Income
Before NOL and
Special Deductions
1990: K-20a
1988-1989: K-19a
1987: M(c)
1984-1986: 24
6.
NOL Deductions
NA, use 0
C-7
September 1991
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Data Item
Location on Form 1065
(Partnership)
7.
Special Deductions
NA., use 0
8.
Total Tax
NA., use 0
1 9
Credit From Regulated
Investment Companies
NA., use 0
10.
Credit For Federal Tax on
Fuels
NA., use 0
11.
Cash
L-l, Col.(d) |
12.
Trade Notes and Accounts
Rec. Less Allowance for Bad
Debts
1990: L-2b, Col.(d) I
1984-1989: L-2a. Col.(d) 1
13.
Inventories
L-3, Co!.(d) I
* -4.
U.S. Government Obligations
1990: L-4, Col.(d) i
1989: L-4a, Col.(d)
1984-1988: L-4, Col. (d)
15.
Tax-Exempt Securities
1990: L-5, Col.(d)
1989: L-4b, Col.(d)
1984-1988: NA., use 0
16.
Other Current Assets
1990: L-6, Col.(d)
1984-1989: L-5, Col.(d)
17.
Accounts Payable
1990: L-l5, Col.(d)
1984-1989: L-l4, Col.(d)
18.
Mortgages, Notes, Bonds
Payable in Less Than One
Year
1990: L-16, Col.(d)
1984-1989: L-15, Col.(d)
1 19'
Other Current Liabilities
1990: L-17, CoL(d)
1984-1989: L-16, CoL(d)
| 20a
Loans From Stockholders
1990: L-18, Col.(d)
1984-1989: L-17, Col.(d)
21.
Mortgages, Notes, Bonds
Payable in One Year or
More
1990: L-19, Col.(d)
1984-1989: L-18, Col.(d)
22.
Other Liabilities
1990: L-20, Col.(d)
1984-1989: L-19, Col.(d)
C-8
September 1991
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Data Item
Location on Form 1065
(Partnership)
23.
Appropriated Retained
Earnings
1990; L-21. Col.(d)
1984-1989; L-20, Col.(d)
24.
Unappropriated
Retained Earnings
NA.. use 0
25.
Total Liability and
Stockholder's Equity
1990: L-22. Col.(d)
1984-1989; L-21. Col.(d)
26.
Income Recorded
on Books not
Included in Return
NA., use 0
1 Identify and sum all income from business activities before expenses, being sure not to double count
any sources. If not itemized on Form 1065. special schedules should be attached providing this
information.
2 Identify and sum all interest expense (not interest income) incurred in all business activities, being
sure not to double count. If not itemized on Form 1065, special schedules should be attached
providing this information.
1 Note that this is a short-cut method that, in some situations, may slightly understate total
depreciation deducted.
4 Note that this is a short-cut method that, in some situations, may slightly understate total depletion
and amortization taken.
C-9
September 1991
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Exhibit C-3
DATA LOCATIONS ON SOLE PROPRIETORSHIP FORM
Data Item
Location on Sole
Proprietorship Form
| (Form 1040 Schedule C)
Gross Receipts or Sales Less
Returns and Allowances
1989-1990: 1-3 j
1984-1988: l ie 1
11
Interest Expense
1990: sum of II- 16a and II-16b |
1986-1989: sum of II-17a and II-17b 1
1985: sum of 11-19 and 11-21
1984: 11-17
3.
Depreciation
1989-1990: 11-13
1984-1988: 11-12 j
4.
Depletion
1989-1990: 11-12
1984-1988: 11-11
5.
Taxable Income Before NCL
and Special Deductions
1990: 11-29
1989: 11-30
1987-1988: 11-31
1986: 11-32
1985: 11-33
1984: 11-32
6.
NOL Deductions
NA., use 0
7.
Special Deductions
NA., use 0
8.
Total Tax
NA., use 0
9.
Credit From Regulated
Investment Companies
NA.. use 0
10.
Credit For Federal Tax on
Fuels
NA. use 0
1 n-
Cash
NA., use 0
12.
Trade Notes and Accounts
Rec. Less Allowance for Bad
Debts
NA.. use 0
13.
Inventories
NA., use 0
1 14'
U.S. Government Obligations
NA., use 0
C-10
September 1991
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Date Item
Location on Sole
Proprietorship Form
(Form 1040 Schedule C)
15.
Tax-Exempt Securities
NA., use 0
16.
Other Current Assets
NA., use 0
17.
Accounts Payable
NA., use 0
18.
Mortgages. Notes. Bonds
Payable in Less Than One
Year
NA.. use 0
19;
Other Current Liabilities
NA., use 0
20.
Loans From Stockholders
NA., use 0
21.
Mortgages. Notes, Bonds
Payable in One Year or More
NA., use 0
22.
Other Liabilities
NA.. use 0
23.
Appropriated Retained
Earnings
NA., use 0
24.
Unappropriated
Retained Earnings
NA., use 0
25.
Total Liability and
Stockholder's Equity
NA.. useO
26.
Income Recorded on Books
not Included in Return
NA., use 0
C-ll
September 1991
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