On Tuesday, January 19, 1988, IBM reported greatly increased earnings for the fourth quarter of 1987. Despite this reported gain in earnings, the price of IBM€™s stock on the New York Stock Exchange declined by $6 per share to $111.75. In sympathy with this move, most other technology stocks also declined.19

IBM€™s fourth-quarter net earnings rose from $1.39 billion, or $2.28 a share, to $2.08 billion, or $3.47 s share, an increase of 49.6 percent and 52.2 percent over the same period a year earlier. Management declared that these results demonstrated the effectiveness of IBM€™s efforts to become more competitive and that, despite the economic uncertainties of 1988, the company was planning for growth.

The apparent cause of the stock price decline was that the huge increase in income could be traced to nonrecurring gains. Investment analysts pointed out that IBM€™s high earnings stemmed primarily from such factors as a lower tax rate. Despite most analysts€™ expectation of a tax rate between 40 and 42 percent, IBM€™s was low 36.4 percent, down from the previous year€™s 45.3 percent. Analysts were also disappointed in IBM€™s revenue growth. Revenues within the United Stated were down, and much of the company€™s growth in revenues came through favorable currency translations, increases that might not be repeated. In fact, some estimates of IBM€™s fourth-quarter earnings attributed $0.50 per share to currency translations and another $0.25 to tax-rate change.

Other factors contributing to IBM€™s rise in earnings were one-time transactions, such as the sale of Intel Corporation stock and bond redemptions, along with a corporate stock buyback program that reduced the amount of stock outstanding in the fourth quarter by 7.4 million shares.

The analysts were concerned about the quality of IBM€™s earnings. Identify four quality of earnings issues reported in the case and the analyst€™s concern about each. In percentage terms, what is the impact of the currency changes on fourth-quartet earnings? Comment on management€™s assessment of IBM€™s performance. Do you agree with management? (Optional question: what has IBM€™s subsequent performance been?) Be prepared to discuss your answer in class.

Jackson Electronics, Inc,

Consolidated Statement of Stockholder€™s Equity

For the year Ended September 30, 2011

(In Thousand)

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Accumulated Additional Treasury Other Preferred Common Pald-In Rtaed Stock, Comprehenslve Stock Stock Capital Earnings Common Income Total Balance at September 30, 2010 2,756 $3,902 14,49 $119,312 942) (1) Net income 2) Unrealized gain on $139,177 18,753 18,753 available for-sale 12,000 12,000 (3) Redemption and retirement of preferred stock 27,560 shares ,756) 4) Stock options exer cised (89,000 shares) (5) Purchases of common stock for treasury (501.412 shares) (6) Issuance of common stock (148,000 shares) in exchange for con- vertible subordinated debentures 7) Issuance of common stock (715,000 shares) for cash (8) Issuance of 500,000 shares of com- mon stock in exchange for investment in Electrix Company shares (2,756) 847 936 (12,552) (12,552) 148 3,635 3,783 715 24,535 25,250 17,263 17,763 (9) Cash dividends- common stock ($0.80 per share) Balance at September 30, 201 0 (3,086) (3,086 S5354 60,429 $134.979 13,494)