Financial Case Study: Google Inc.

Topics: Revenue, Income statement, Stock market Pages: 7 (2400 words) Published: December 9, 2012
Google Inc.—Earnings Announcements and Information Environment Teaching notes: This case considers how investors and financial analysts and business press writers use accounting information, particularly earnings. The case is designed to give students “hands on” experience with complementary sources of information about Google’s performance—the formal audited financial statements, an earnings press release, pro forma earnings disclosure, and comparative stock charts. Google is a prime example of how good news is in the eye of the beholder! In Q4 2007, Google announced continued revenue growth and strong earnings. The press release was upbeat and optimistic. Yet, the stock plunged the following day. Evaluating how the business press interprets a firm’s performance can help build students’ confidence in their own ability to evaluate and interpret financial statements. The case begins with Google’s audited financial statements which, as is typical, were released well after the end of the fiscal year. This raises the issue that investors get “advance” information about earnings – from manager guidance to analyst’s forecasts to formal earnings press releases. Instructors can emphasize that although the audited statements are not the most timely source of information, they play a key “confirmatory” role because they are more credible than manager and analyst information. We use this as an opportunity to discuss the various manager and analyst incentives that may influence the accuracy or “bias” in the information they report. While the case does not explicitly require it, instructors may encourage students to access and review sample analyst reports for Google to highlight the important third-party intermediary role that analysts play in interpreting the firm’s performance and prospects and the abundance of information they provide to investors. Several questions about the recent patterns in Google’s revenues and expenses lead students to conclude that the company continues to grow and perform well. The case then asks students to consider Google’s press release that continues the “good news” theme. The press release also provides pro forma numbers that back out stock option compensation. We use this to reemphasize the fact that managers can and do seek to cast the most favorable light on their company’s financial information. The last part of the case asks students to compare Google’s financial performance with stock price performance and to evaluate the stock market’s reaction to Google’s actual earnings announcement. Invariably, students are taken by surprise – the earnings report and press release don’t seem to predict the negative market reaction. This exercise is designed to encourage students to think about how earnings information is received by investors.

Google Inc.—Earnings Announcements and Information Environment 1 © Copyright 2012 by Cambridge Business Publishers, LLC. All rights reserved. No part of this publication may be reproduced in any form for any purpose without the written permission of the publisher.

Google Inc.—Earnings Announcements and Information Environment a. In the financial statement opinion, the auditors, Ernst & Young, LLP, state that “In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Google Inc. at December 31, 2006 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.” This standard-language passage indicates that the opinion is unqualified, or “clean.” The audit opinion is dated February 14, 2008. This is about 45 days after the end of Google’s fiscal year and represents the date when all significant audit field work was completed. b. i. Pro forma earnings numbers exclude expenses and losses (and sometimes revenues and gains) that managers believe...
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