PROBLEM 2-17A Earnings Quality The following is an excerpt from a quarterly earnings announcement by American Express: American Express Reports Record Quarterly Net Income of $648 Million QUARTER ENDED SEPTEMBER 30 ($ millions except per share amounts) Net income Net revenues Per share net income (Basic) Average common shares outstanding Return on average equity ($ millions except per share amounts) Net income Net revenues Per share net income (Basic) Average common shares outstanding Return on average equity NINE MONTHS ENDED SEPTEMBER 30 20X9 20X8 $1,869 $ 1,611 $14,211 $12,662 $4.18 $3.53 447.0 456.2 25.3% 20X9 20X8 $ 574 $648 $4,879 $4,342 $ 1.45 $ 1.27 446.0 23.9% 25.3% American Express 451.6 Chapter Two | Financial Reporting and Analysis 16.0% 12.2% 18.4% (2.0%) 23.9% Percentage Inc./(Dec.) Due to a change in accounting rules, the company is required to capitalize software costs rather than expense them as they occur. For the third quarter of 20X9, this amounted to a pre-tax benefit of $68 million (net of amortization). Also, the securitization of credit card receivables produced a gain of $55 million ($36 million after tax) in the current quarter. Percentage Inc./(Dec.) 13.0% 12.4% 14.2% (1.2%) Required: Evaluate and comment on both (a) the earnings quality and (b) the relative performance of American Express in the most recent quarter relative to the same quarter of the prior fiscal year. CHECK Adjust for unusual items 129
PROBLEM 2-17A Earnings Quality The following is an excerpt from a quarterly earnings announcement by American Express: American Express Reports Record Quarterly Net Income of $648 Million QUARTER ENDED SEPTEMBER 30 ($ millions except per share amounts) Net income Net revenues Per share net income (Basic) Average common shares outstanding Return on average equity ($ millions except per share amounts) Net income Net revenues Per share net income (Basic) Average common shares outstanding Return on average equity NINE MONTHS ENDED SEPTEMBER 30 20X9 20X8 $1,869 $ 1,611 $14,211 $12,662 $4.18 $3.53 447.0 456.2 25.3% 20X9 20X8 $ 574 $648 $4,879 $4,342 $ 1.45 $ 1.27 446.0 23.9% 25.3% American Express 451.6 Chapter Two | Financial Reporting and Analysis 16.0% 12.2% 18.4% (2.0%) 23.9% Percentage Inc./(Dec.) Due to a change in accounting rules, the company is required to capitalize software costs rather than expense them as they occur. For the third quarter of 20X9, this amounted to a pre-tax benefit of $68 million (net of amortization). Also, the securitization of credit card receivables produced a gain of $55 million ($36 million after tax) in the current quarter. Percentage Inc./(Dec.) 13.0% 12.4% 14.2% (1.2%) Required: Evaluate and comment on both (a) the earnings quality and (b) the relative performance of American Express in the most recent quarter relative to the same quarter of the prior fiscal year. CHECK Adjust for unusual items 129
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Evaluate and comment on both (a) the earnings quality and (b) the relative performance of American Express in the most recent quarter relative to the same quarter of the prior fiscal year.
Transcribed Image Text:PROBLEM 2-17A
Earnings Quality
The following is an excerpt from a quarterly earnings
announcement by American Express:
American Express Reports Record Quarterly Net Income of $648 Million
QUARTER ENDED
SEPTEMBER 30
($ millions except per share amounts)
Net income
Net revenues
Per share net income (Basic)
Average common shares outstanding
Return on average equity
($ millions except per share amounts)
Net income
Net revenues
Per share net income (Basic)
Average common shares outstanding
Return on average equity
NINE MONTHS ENDED
SEPTEMBER 30
20X9
$ 1,869
$14,211
$4.18
447.0
25.3%
20X9
$ 648
$4,879
$1.45
446.0
20X8
$1,611
$12,662
$ 3.53
456.2
25.3%
23.9%
American Express
20X8
$ 574
$ 4,342
$ 1.27
451.6
23.9%
Chapter Two I Financial Reporting and Analysis
Percentage
Inc./(Dec.)
16.0%
12.2%
18.4%
(2.0%)
Due to a change in accounting rules, the company is required to capitalize software
costs rather than expense them as they occur. For the third quarter of 20X9, this
amounted to a pre-tax benefit of $68 million (net of amortization). Also, the
securitization of credit card receivables produced a gain of $55 million ($36 million
after tax) in the current quarter.
Percentage
Inc./(Dec.)
13.0%
12.4%
14.2%
(1.2%)
Required:
Evaluate and comment on both (a) the earnings quality and (b) the relative performance of
American Express in the most recent quarter relative to the same quarter of the prior fiscal
year.
CHECK
Adjust for unusual
items
129
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