Aol Paper

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Case: America Online

Instructions: Refer to the Wall Street Journal article (attached) from October 30, 1996 on America Online (AOL) in answering the following questions. 1. What accounting approach has AOL used in the past that it is now changing (related to the $385 million)?

2. What was AOL’s rationale for using the past accounting approach? What accounting principle(s) was it following?

3. What do you think is meant by the term the “quality of earnings” (see page two of article, top paragraph). What, in your opinion, would constitute “high” quality earnings?

4. Which financial statements were affected by the charge? How?

5. Which financial ratios will be affected by the charge?

6. What was the cash impact of the charge?

7. Why does Mr. Vohra, an analyst (see column one, last paragraph), say that “The earnings numbers were meaningless – they were a house of cards”?

8. What was “aggressive” about AOL’s accounting approach (see column two, paragraph two)?

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9. It is reported (paragraph 3) that AOL’s share price rose on the news of the accounting change. (a) Do you think that accounting changes drive stock prices? Comment.

(b) What else might have caused AOL’s share price to move upward?

10. AOL mentions (column one, paragraph two) a charge of $75 million. Explain the nature of this charge and how it will affect the financial statements.

11. (a) On the web, go to http://www.sec.gov/edgar/searchedgar/companysearch.html

(EDGAR FORM PICK) (b) Enter CIK or Ticker Symbol: 0000883780 and click “Find Companies” (c) Set Filing Type: 10-K and click “search” (d) Click, the 10-K with Filing Date: 1997-09-29 (e) Click: 0000883780-97-000014.txt (at the bottom of the page) When you click in this space, you will get the 10-K filing of AMERICA ONLINE for fiscal year 1997, which contains, among other things, the consolidated balance sheet, the consolidated statement of operations (i.e., the income statement,) and the notes to the...