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Earnings announcements make great headlines. The numbers are quick and simple, and give an immediate image of success or failure.

Large companies such as General Electric ( GE) and Caterpillar ( CAT), which posted second-quarter earnings in the past five days, can skyrocket or get hammered if results beat or miss analysts' expectations by only a few cents a share. But that can be largely irrational when the quality of earnings is assessed.

There are many ways management can play with numbers to shape results. So-called early-revenue recognition and capitalization of costs that should be expensed are two examples. On the whole, these manipulations stem from something called accrual accounting, in which firms shift costs and revenue to better reflect the actual performance in a particular quarter.

An example of this would be a company dealing in magazine subscriptions. While customers will pay for a year's worth of magazines up front, the company won't provide the magazines until sometime in the future. Without accrual accounting, the resulting financial statements would look odd. All of the revenue from the subscription would appear on the income statement in the first quarter, while only one quarter's worth of costs would be charged against this revenue.

In the following quarter there would be no revenue, since it had been realized in the first quarter, but there would be another quarter's worth of expenses being charged against no revenue. This would result in a huge amount of volatility in earnings from quarter to quarter. To fix that, accrual accounting allows the company to split payments into two categories, regular revenue and unearned revenue, which will be slowly drawn down each quarter to match the costs associated with producing the product.

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