Graham examines the annual earnings report of an example company to illustrate that the quality and transparency of financial statements play a crucial role in informing investors and impacting stock prices. The earnings report is from the Aluminum Company of America (ALCOA) from the year 1970. Graham shows that important information is often buried in the footnotes of financial reports and highlights the importance of reading and understanding these footnotes for a comprehensive understanding of a company’s financial health.

He discusses the concept of “special charges,” which refers to one-time expenses or non-recurring items that can significantly impact a company’s earnings. In examining the footnotes of ALCOA’s report, Graham sees that their special charges for the year arise from various sources: estimated costs of closing down a division; costs for closing down plants; losses from phasing out a certain product line; and estimated costs associated with construction. He points out that while the normal criteria for special charges require that they be nonrecurring and extraordinary, companies often use this category as a catch-all for any expenses that they want to exclude from their regular operating expenses.

Graham also addresses the dilution of earnings through stock options and convertible

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