In a recent year, analysts expected IBM to earn $1.32 per share. The company actually earned $1.33. Microsoft was expected to earn $.43 per share, but it earned only $.41. The corporate income statements of these companies show that Microsoft had a special charge (with corresponding liability) of $660 million, or $.06 per share, based on settlement of a class-action lawsuit filed on behalf of consumers, whereas IBM had no such charge.22
Assume you work for an investment manager who has asked you to write a memorandum in one page or less that assesses these results. Specifically, who did better, Microsoft or IBM? Use quality of earnings to support your answer and comment on the effect of Microsoft's special charge on current and future cash flows.