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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

Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter5: The Income Statement And The Statement Of Cash Flows
Section: Chapter Questions
Problem 5E: Multiple-Step and Single-Step In coin Statements The following items were derived from Gold...
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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 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
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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