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.
PROBLEM 2–17A see images attached
Earnings Quality
The following is an excerpt from a quarterly earnings announcement by American Express:
American Express
American Express Reports Record Quarterly Net Income of $648 Million
QUARTER ENDED SEPTEMBER 30
Percentage Inc./(Dec.)
13.0% 12.4% 14.2%
(1.2%)
($ millions except per share amounts)
Net income
Netrevenues
Per share net income (Basic) Average common shares outstanding
20X9
$ 648 $ 4,879
20X8
$ 574 $ 4,342
$
1.45 446.0
25.3%
$
1.27 451.6
23.9%
Chapter Two | Financial Reporting and Analysis
129
NINE MONTHS ENDED SEPTEMBER 30
Percentage Inc./(Dec.)
16.0% 12.2% 18.4%
(2.0%)
($ millions except per share amounts)
Net income
Net revenues
Per share net income (Basic) Average common shares outstanding Return on average equity
20X9
$ 1,869 $14,211 $ 4.18 447.0
25.3%
20X8
$ 1,611 $12,662 $ 3.53 456.2
23.9%
Required:
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.
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.
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