Assignment questions1. In general, what types of issues come to mind when you hear analysts question a firm's "earnings quality"?2. Why is Harry Malone concerned about relying on Nuware's reported performance? If Nuware follows GAAP, shouldn't the company's reported financial statements be reliable?3. Assume the role of Hereford and restate Nuware's 2003 earnings as if the company had used a similar accounting method and assumptions. After such restatement, do Nuware's earnings and earnings growth remain superior to that of R. P. Stuart?4. Would you characterize the accounting discretion applied by Nuware management as aggressive? Do you think the company has been "managing" earnings?

1. In general, what types of issues come to mind when you hear analysts question a firm's "earnings quality"?2. Why is Harry Malone concerned about relying on Nuware's reported performance? If Nuware follows GAAP, shouldn't the company's reported financial statements be reliable?3. Assume the role of Hereford and restate Nuware's 2003 earnings as if the company had used a similar accounting method and assumptions. After such restatement, do Nuware's earnings and earnings growth remain superior to that of R. P. Stuart?4. Would you characterize the accounting discretion applied by Nuware management as aggressive? Do you think the company has been "managing" earnings?

Exhibit 1NuWare Inc.

Consolidated Statement of Operations(in thousands except per share amounts)

For the fiscal year ended January 31,2003 2002 2001

Net sales 1,754,861 1,709,254 1,611,498 Operating costs and expenses

Cost of sales (including occupancy costs) 1,001,892 1,009,893 919,871 Selling, general and administrative expenses 586,124 555,508 565,475 Depreciation and amortization 36,356 32,196 30,229

Operating income 130,489 111,657 95,923 Non-operating (income) and expenses:

Interest and investment income (9,382) (5,784) (5,014)Interest expense 2,508 2,290 3,048

Income before income taxes 137,363 115,151 97,889 Provision for income taxes 50,784 42,576 36,220 Net income 86,579 72,575 61,669 Earnings per share:

Basic 0.86 0.72 0.62 Diluted 0.82 0.70 0.60

Dividend declared per share 0.16 0.16 0.15 Average shares outstanding during the period:

Basic 100,883 100,883 99,631 Diluted 105,823 103,972 102,003

Exhibit 2 NuWare Inc. Consolidated Balance Sheets

(in thousands except per share amounts)As of January 31,

2003ASSETSCurrent assets:

Cash, including AFS investments 192,114 Beneficial interest in securitized receivables 40,538 Accounts receivable, net of reserves 295,888 Inventories 247,502 Prepaid expenses and other current assets 56,179

832,221

Property, net 374,493 Other noncurrent assets 49,411

Total Assets 1,256,125

LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:

Current portion of long-term debt 393 Accounts payable 176,702 Gift cards, gift certificates and merchandise credits outstanding 117,495 Accrued income taxes payable 35,798 Other accrued liabilities 192,348 Total current liabilities 522,736

Long-term debt 25,007 Other noncurrent liabilities 54,962

Shareholders' equity:Common stock, $0.10 par, 500 million authorized100,883,000 shares issued 10,088 Paid-in capital 479,074 Retained earnings 314,124

Cumulative other comprehensive income (loss) (11,210)

Less: 10,045,000 and 7,362,000 common shares in treasury, at cost (138,656) 653,420

Commitments and contingencies -

Total Liabilities and Shareholders' equity 1,256,125

As of January 31,2002 2003 2002

55,609 AFS investments 59,716 35,076 34,620 363,424 Reserve for doubtful accounts 9,438 16,140 230,911 43,286 727,850

370,262 47,985 1,146,097

356 129,076 139,852 29,738 170,053 469,075

25,356 43,264

10,088 440,190 243,257

(4,702)

(80,521) Treasury stock 138,656,000 80,521,000 608,312 No. of treasury shares 1,004,500 7,362,000 -

1,146,007

Exhibit 3 NuWare Inc.Selected Excerpts from Notes to Financial Statements

(Source: Notes to Consolidated Financial Statemet, Nuware, Inc. Annual Report)

2003 2002Use of Estimates

Cash and Receivables

Merchandise InventoriesValued at the lowest of Cost (LIFO method) or market (Retail method)LIFO adjustment to ending inventory:

Old method 33,000 New method 35,100

Effect of accounting policy change in 2002:Net income lower by 2,100 basic EPS lower by 0.02 diluted EPS lower by 0.02

Cumulative effect of accounting change Not ascertainable

Total charges to cost of sales include:Occupancy costs 45,000 44,000

If FIFO method of inventory valuation is used,Value of inventories would have been higher by 29,500 35,100

Plant, Property and EquipmentFurniture and equipment Historic cost SLM 3 - 10 Buildings Historic cost SLM 30 Leasehold improvements Historic cost Min( useful life, term of lease)

Accumulated depreciation - 304,500 268,500

Depreciation expenses 35,698 31,572

Financial Instrumentsfair value <-- market data, valuation techniques

AFS investments:Unrealized holding gains shown on Balance sheetnet realized gains on sale of AFS investments 6,700 4,800

Revenue Recognition

Advertising and marketing costspolicy on Promotional costsAdvertising costs 62,211 67,450 Marketing and promotional costs 20,527 17,561

of which, portion deferred at end of the fiscal years 10,200 8,700

Short-term and long-term debt

Long-term debt, including current maturities:7-10% Debentures 24,438 24,467 Medium-term notes 785 1,050 Sinking fund debentures 177 195

25,400 25,712 less: current maturities 393 356 Long-term maturities 25,007 25,356

Stock compensation

Effect on net income if fair-value based method has been appliedNet income, as reported 86,580 72,575 Less: expense under fair value method, net of tax 1,071 707 Pro forma net income 85,509 71,868

Pro forma earnings per shareBasic 0.85 0.71 Diluted 0.81 0.69

2001

Not ascertainable

44,000

years years

Min( useful life, term of lease)

26,620

3,700

58,727 19,044

Exhibit 4Sears, Roebuck and Company

Earnings Sensitivity Analysis as example

Receivables and inventory

source 2001 2000 1999Reported Earnings and non-recurring items

Net sales I/S 41,078 40,937 39,484 Net income before taxes I/S 1,202 2,174 2,357 Tax expense I/S 467 831 904 Net income after taxes I/S 735 1,343 1,453 Average effective tax rate computed 38.9% 38.2% 38.4%

Non-recurring charges before tax I/S 1,064 251 41 Adjusted Net income after tax computed 1,386 1,498 1,478

Accounts Receivable AnalysisReported Values:

Gross receivables B/S 29,321 21,108 21,937 Reserve for uncollectibles B/S 1,166 686 760 Net receivables B/S 28,155 20,422 21,177 Bad debt expense I/S 1,866 884 871 Write-offs footnotes 1,386 958 1,085

Inferred values and computed ratiosReserve / Accounts Receivable 3.98% 3.25% 3.46%Change in reserve / Accounts receivable 0.73% -0.21% -0.73%Accounts receivables turnover 1.69 1.97 1.82 Days receivables turnover 216 185 201

Effect of 0.73% shift in Reserve / Acc. Rec. 131.00 95.00 99.00 As a % of NI (with nonrecurring items) 17.8% 7.1% 6.8%As a % of NI (without nonrecurring items) 9.5% 6.3% 6.7%

Inventory AnalysisReported Values:

Inventory (LIFO) B/S 4,912 5,618 5,069 LIFO Reserve footnotes 591 566 595 Cost of goods sold (LIFO) I/S 26,322 26,899 25,627

Inferred values and computed ratiosInventory (FIFO) 5,503 6,184 5,664

Cost of goods sold (FIFO) 26,297 26,928 25,711 Inventory Turnover (LIFO) 5.00 5.03 4.93 Inventory Turnover (FIFO) 4.50 4.55 4.41 Days Inventory Turnover (LIFO) 73.01 72.51 74.00 Days Inventory Turnover (FIFO) 81.11 80.30 82.80

Effect of LIFO on Reported Earnings -15.3 17.9 51.8As a % of NI (with nonrecurring items) -2.1% 1.3% 3.6%As a % of NI (without nonrecurring items) -1.1% 1.2% 3.5%

1998

41,575 1,838 766 1,072

41.7%

23,240 974 22,266 1,287

4.19%

5,322 679 27,444

6,001

Exhibit 5R. P. Stuart Company

Consolidated Statement of Operations

(in thousands except per share amounts)For the fiscal year ended January 31,

2003 2002 2001Net sales 567,411 525,697 502,292 Cost of sales (including occupancy costs) 352,682 316,500 305,401

Gross profit 214,729 209,197 196,891 Selling, general and administrative expenses 164,550 156,942 149,884 Store preopening expenses 4,603 5,371 4,584 Income from operations 45,576 46,884 42,423

Non-operating (income) and expenses:Interest and investment income (883) (1,294) (1,180)Interest expense 4,884 4,999 5,238

Income before income taxes 41,575 43,179 38,365 Provision for income taxes 16,214 16,836 14,956 Net income 25,361 26,343 23,409 Earnings per share:

Basic 0.80 0.85 0.78 Diluted 0.77 0.83 0.75

Dividend declared per shareAverage shares outstanding during the period:

Basic 31,649 31,105 30,064 Diluted 32,960 31,876 31,199

Exhibit 6 R. P. STUART COMPANY

Consolidated Balance Sheets

(in thousands except per share amounts)As of January 31,

2003ASSETSCurrent assets:

Cash and Cash equivalents 45,420 Credit receivables, net of allowances 269,115 Merchandise inventories 131,344 Other current assets 16,789 Total current assets 462,668

Property and equipment, gross 430,256 Accumulated depreciation (135,692)Goodwill 4,178 Other assets 9,287

Total Assets 770,697

LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:

Current portion of long-term debt 4,809 Accounts payable 73,990 Accrued income taxes payable 15,082 Accrued compensation 8,305 Other accrued liabilities 28,986 Total current liabilities 131,172

Long-term debt 13,216 Other noncurrent liabilities 55,091

Shareholders' equity:Preferred stock, $0.01 par value: 6,500,000 shares authorizednone issue and outstanding - Common stock, $0.01 par, 80 million shares authorizedIssued and outstanding: 31,649,743 and 31,105,437 shares 316 Additional Paid-in capital 275,089 Retained earnings 295,813 Cumulative other comprehensive income (loss) -

571,218 Less: common shares in treasury, at cost -

Commitments and contingencies - 571,218

Total Liabilities and Shareholders' equity 770,697

As of January 31,2002 2003 2002

111,815 217,123 Allowances for card receivable 12,650 10,327 109,829 11,107 449,874

356,096 (116,092) 4,340 10,080 704,298

3,468 81,592 29,993 18,506 18,251 151,810

15,498 44,035

-

311 220,056 272,588 - 492,955 -

- 492,955

704,298

Exhibit 7R. P. STUART COMPANY

Selected Excerpts from Notes to Financial Statements

Exhibit 8Miscellaneous Profitability Statistics

Nuware, Inc.2003 2002 2001

Net income USD 86,579 USD 72,575 USD 61,669Net income per diluted share USD 0.82 USD 0.70 USD 0.60Return on AssetsReturn on Equity 13.72% 11.93%Average effective tax rate 37.0% 37.0% 37.0%EPS growth 17.2% 15.5%Sales growth 2.7% 6.1%Gross profit margin 42.9% 40.9% 42.9%

Miscellaneous Profitability Statistics

R. P. Stuart Company2003 2002 2001

USD 25,361 USD 26,343 USD 23,409USD 0.77 USD 0.83 USD 0.75

4.8% 5.3%39.0% 39.0% 39.0%-6.9% 10.1%7.9% 4.7%

62.2% 60.2% 60.8%