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Analyzing Financial Statements. Financial Information Balance Sheet Income Statement Cash Flow Statement Financial Ratios Trends Industry Norms Industry/Competitive Analysis. Cooking the Books. Aggressive application of accounting rules Estimates Fraud. Overstating Revenues.

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analyzing financial statements
Analyzing Financial Statements
  • Financial Information
    • Balance Sheet
    • Income Statement
    • Cash Flow Statement
    • Financial Ratios
      • Trends
      • Industry Norms
  • Industry/Competitive Analysis
cooking the books
Cooking the Books
  • Aggressive application of accounting rules
  • Estimates
  • Fraud
overstating revenues
Overstating Revenues
  • Selling to Related Entities
    • The party must be an “arms length”
  • Stuffing the Channels
    • Excessive quantities to distributors/retailers
    • Extended credit terms
  • Installment sales at Low Interest Rates
    • Artificially low interest rate to calculated time-adjusted cash flows = higher recognized Revenues
overstating revenues1
Overstating Revenues
  • Using funds from Over-funded Reserves
    • Reserves obligation will fluctuate
    • Using over-funded Reserves can result in under-funding at later accounting periods.
  • Treat Nonrecurring Dispositions as Ordinary Income
    • “Below-the-line” gains are nonrecurring
    • Can over-state Income from normal business operations
overstating revenues2
Overstating Revenues
  • Record Income for Future Services
    • “Bundled price” includes deferred expenses
    • May underestimate value of future services to over-state current Revenues
understating expenses
Understating Expenses
  • Unrealistic Depreciation/Amortization
    • Allowable to use a different method for public financial reports from Tax (IRS) reporting
  • Capitalize Questionable Expenses
    • Capitalization or Expense?
    • Capitalization = deferred expenses
    • Match Expenses to Revenues
understating expenses1
Understating Expenses
  • Ignore the cost of Stock Options
    • When exercised
      • Increases outstanding shares and affects EPS
      • Loss of value to company if strike price below market price
    • How to value?
      • Must have some value to have meaning to recipient
      • Valuation methods require making assumptions
overstate assets or understate liabilities
Overstate Assets or Understate Liabilities
  • Delay Recognizing Declining Asset Value
    • Dressing up the Balance Sheet
      • Accounts Receivable and Allowance for Doubtful Accounts
      • Loans Receivable and Allowance for Bad Debt
      • Inventory and Allowance for Obsolete Inventory
      • Fixed Assets and writing off obsolete assets
      • Investments and unrealistic market valuation
    • Conservatism requires the Accountant to understate assets
failure to disclose liabilities
Failure to Disclose Liabilities
  • Must disclose all liabilities
    • Pending lawsuits
    • Pension costs
    • Toxic cleanup
    • Deferred Executive compensation
  • Use Unconsolidated Debt
    • Offload debt from one affiliated to another
    • Dresses up Balance Sheet
    • Relationships must be reported in footnotes
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