Accounting Analysis

Question 0

Aggressive accounting

Shenanigan1. Recording revenue too soon

Answer 0

Recording revenue when future services remain to be provided

Recording revenue before shipment

Recording revenue even when customer is not obligated to pay

Question 1

Must watch red flags for any accounting analysis

Answer 1

1. Reported net income grows faster than cash flow from operation
2. Accounts receivables grows faster than sales growth
3. Sales slow while inventories pile up
4. Bad debt reserves cut
5. Method for calculating revenue and costs change
6. Sales are booked before payment received
7. Dramatic change in gross margin
8. Turnover of auditor, key execs or lawyers.

Question 2

Aggressive accounting

Shenanigan 2. Boosting income with one time gain

Answer 2

1. Boosting profit by selling undervalued assets
2. Including gains as part of revenue
3. Reporting gains as a reduction in operating expenses
4. Creating income by reclassifying of balance sheet accounts

Question 3

Shenanigan 3. Shifting current expenses to a later period

Answer 3

1. Improperly capitalist normal operating costs
2. Depreciating or amortizing costs too slowly
3. Failing to write off worthless assets
4. Reducing asset reserves

Question 4

Shenanigan special cases

Answer 4

Unrecorded stock option liabilities
- msft issued 1.6 bn shares as stock options and repurchased 677m shares to offset dilutions. Cash cost of repurchase 16,2 bn and msft was able to reclaim tax rebate of 12bn

Defined benefit pension plan - company must make periodic payments if the plan is underfunded. The question is we don’t know whether it is underfunded or overfunded in any case this vagueness gives the opportunity for the management to play shenanigans (for instance assumption changes)

Question 5

Conservative policy
Shenanigan 4.
Pushing current income to a later period

Answer 5

Special case - during M&A, target company might hold on to recognizing the revenue during stub period and once merged reveals it to show artificial boost in revenue

Question 6

Conservative
Shenanigans 5.
Shifting future expense to the current period

Answer 6

Take over acquisition related Big bath, as the new management is keen to bury all the bad stuff as well as some making some cushion for themselves