General Electric Company (GE) is a large U.S.-based conglomerate, with operations that included industrial equipment and services, healthcare, TV and entertainment, and commercial finance. The sheer complexity and industry diversity of GE made it particularly difficult for even financial analysts to fully understand since it is unlikely, if not impossible, for anyone to be an expert in all the industries in which the company operated. As a result, it was very difficult for investors to predict GE’s future performance. This put a strong onus on GE management to assist investors in this regard.

Table below shows reported earnings for GE for the years indicated. What is striking is the steady increase in reported earnings until 2008. Only in 2005, when net income was pulled down by a large loss on discontinued operations, was there a small break in this impressive pattern of earnings growth.

A. Table above suggests that, until 2008, GE was quite successful in smoothing earnings. Was earnings management by GE during the period 1993–2007  good or bad? Explain.

B. Market responded negatively to the lower reported earnings in 2008. Before announcing 2008 earnings, Mr. Welch urged the management to report increased earnings for the year. Would you suggest GE to adopt Mr. Welch’s suggestion? Explain why or why not.

 

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Reported NI $17.335 22,208 Year Year Reported NI 2008 2007 2005 2006 2004 20,829 17,160 14.118 12,735 9,296 7,280 4,726 4,725 16,711 15,002 13,684 10,717 2003 2002 2001 2000 1999 1998 1997 8,203 6,573 4,315 1996 1995 1994 1993 1992 Reported NI $17.335 22,208 Year Year Reported NI 2008 2007 2005 2006 2004 20,829 17,160 14.118 12,735 9,296 7,280 4,726 4,725 16,711 15,002 13,684 10,717 2003 2002 2001 2000 1999 1998 1997 8,203 6,573 4,315 1996 1995 1994 1993 1992

Answer rating: 100% (QA)

Revenue management consists of strategies used to increasedecrease documented income Reporting a rising tendency in net income or obtaining a massive bonus would be the principal incentives for opportunistic earnings management Smoothing the earnings within a time can be a reason for earnings management A good till 2008 earning of GE are increasing 2008 it suddenly E and drastically decreasing B do market responded badly Mr wench suggestion about management to report the increased ... View the full answer