Evalute and comment on both (a) the earnings quality and (b) the relative performace of American Express in rhe most recent quarter relative to the same quarter of the prior fiscal year.

Problem 2-17

6. How does accrual accounting provide superior into c. What are the imperfections of accrual accounting? Is it possible for accrual accounting to deep reality? Explain. d. What is the prudent approach to analysis using accrual accounting information? PROBLEM 2-174 Earnings Quality American Expres The following is an excerpt from a quarterly earnings announcement by American Express: American Express Reports Record Quarterly Net Income of $648 Million QUARTER ENDED SEPTEMBER 30 Percentage ($ millions except per share amounts) 20x9 20x8 Inc./(Dec.) Net income $ 648 $ 574 13.0% Net revenues $ 4,879 $ 4,342 12.4% Per share net income (Basic) $ 1.45 $ 1.27 14.2% Average common shares outstanding 446.0 451.6 (1.2%) Return on average equity 25.3% 23.9% Chapter Two Financial Reporting, and Analysis 129 NINE MONTHS ENDED SEPTEMBER 30 Percentage Inc./(Dec.) 20X9 20X8 ($ millions except per share amounts) Net income Net revenues Per share net income (Basic) Average common shares outstanding Return on average equity $ 1,869 $14,211 $ 4.18 447.0 25.3% $ 1,611 $12,662 $ 3.53 456.2 23.9% 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. 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 CASES monart of Colgate in Colgate CASE 2-1