Earnings, Expenses, and Expectations

This chapter provides summary of bottom-line numbers of earnings and expenses. Net income and earnings per share (EPS) usually are considered premier bottom-line numbers, the most appropriate measures of earnings. Net income is a relatively complete measure of all business activity (close to what is called all-inclusive income), because it includes nonrecurring items in addition to normal operating income. Meeting earnings targets specified in terms of net income or EPS suggests the potential for earnings magic in some set of revenue or expense categories. There exist many variables and parameters which can give one some information about a company's earnings and expenses but the problem is that of reliability. Each measure provides a different perspective. Corporations have considerable flexibility, and focusing on other measures may provide significant earnings magic insight. Companies specializing in earnings magic are likely to use both revenue and expense strategies simultaneously, such as recognizing revenues early and operating expenses late.