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study objectives After studying this chapter, you should be able to: 1 Understand the concept of sustainable income. 2 Indicate how irregular items are presented. 3 Explain the concept of comprehensive income. 4 Describe and apply horizontal analysis. 5 Describe and apply vertical analysis. 6 Identify and compute ratios used in analyzing a company’s liquidity, solvency, and profitability. 7 Understand the concept of quality of earnings. chapter Financial Analysis: The Big Picture 658 13 the navigator Scan Study Objectives Read Feature Story Preview Text and Answer p. 666 p. 670 p. 677 Work Using the Decision Toolkit Review Summary of Study Objectives Comprehensive p. 694 Answer Self-Study Questions Complete Assignments Do it! Do it! 2918T_c13_658-717.qxd 9/5/08 2:26 PM Page 658
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There it is again, perched near the top of Fortune ’s “Most Admired Companies” list. But when the people who run General Electric go out in public these days, they don’t exactly get to bask in adulation. Instead, they have to explain how their company is not like Enron , or Global Crossing , or Tyco . At one level, that’s a pretty easy argument to make. GE is not about to collapse or to break up. It has tons of cash, and its businesses generate upwards of a billion dollars every month. It is one of only a handful of companies with a triple-A credit rating. It makes real things like turbines and refrigerators that people spend real money to buy. GE also has an enviable record of pleasing Wall Street. Quarter after quarter, year after year, GE’s earnings come gushing in, usually at least 10% higher than the year before, and almost invariably in line with analysts’ estimates. This used to be seen as a good thing. “Making the numbers” became the most watched measure of corporate performance. By missing only once during a 10-year period (by a penny, in the fourth quarter of 1997), GE ensured itself a hallowed place in the corporate hall of fame. But as one analyst noted, “Smoking used to be chic and fashionable and cool; now it’s not. The companies that reliably deliver 15% earnings growth year after year are the new smokers.” All of which means that GE’s chief executive, Jeffrey Immelt, now finds himself having to tell interviewer after interviewer that no, he’s not an earnings cheat. “Would a miss be more honest?” Immelt asks, with exasperation in his voice. “I think that’s terrible. That’s where the world has gotten totally turned on its head, where somewhere I’d walk up to a podium and get a Nobel Peace Prize for saying ‘I missed my numbers—aren’t you proud of me?’” In the spring of 2008, GE did miss its earnings target. In the words of one writer, GE missed it “by a country mile.” Rather than winning a prize, Mr. Immelt watched GE’s value fall by $47 billion. It was the second largest one-day loss by any company in history.
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This note was uploaded on 07/13/2011 for the course ACC 201 taught by Professor Kaiama during the Spring '08 term at Hawaii.

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