PROBLEM 2–10 Emerson Electric is engaged in design, manufacture, and sale of a broad range of electrical, electromechanical, and electronic products and systems. The following shows Emerson’s net income and net income before extraordinary items for the past 20 years

(in millions):

Net Income Net Income Net Income before before before Net Extraordinary Net Extraordinary Net Extraordinary Year Income Items Year Income Items Year Income Items Y1 $201.0 $201.0 Y8 $408.9 $408.9 Y15 $ 708.1 $ 708.1 Y2 237.7 237.7 Y9 467.2 467.2 Y16 788.5 904.4 Y3 273.3 273.3 Y10 528.8 528.8 Y17 907.7 929.0 Y4 300.1 300.1 Y11 588.0 588.0 Y18 1,018.5 1,018.5 Y5 302.9 302.9 Y12 613.2 613.2 Y19 1,121.9 1,121.9 Y6 349.2 349.2 Y13 631.9 631.9 Y20 1,228.6 1,228.6 Y7 401.1 401.1 Y14 662.9 662.9 Emerson has achieved consistent earnings growth for more than 160 straight quarters (more than 40 years).

Required:

a. What earnings strategy do you think Emerson has applied over the years to maintain its record of earnings growth?

b. Describe the extent you believe Emerson’s earnings record reflects business activities, excellent management, and/or earnings management.

c. Describe how Emerson’s earnings strategy is applied in good years and bad.

d. Identify years where Emerson likely built hidden reserves and the years it probably drew upon hidden reserves.