Detecting creative accounting 201
The most important thing to a company is profit or what is commonly known as the bottom line – earnings per share, essentially related to net profits also.
A profit is not a profit as stated on company’s income statement. In fact, do not take the profit figures on published financial statements as the truth and nothing but the truth. There are more than 101 ways to misrepresent profit and the list do not ends as people is creative enough to add on to it.
Accounting consists of double entry bookkeeping, misrepresent profits corresponds to misrepresent of assets also.
Image Credits: hmk
For example, an accountant can choose to book the whole research and development expenditure as capital investment or as expenses in the year in which it is incurred. The simple act of changing this with a few strokes of pen means that profit for that year can differ significantly. The problem is that not all new product lines amount to success.
Tax is the most reliable measure of profitability.
The tax number is the most accurate simply because there is no incentive for a business to pay more tax than is necessary and so far I have not heard of any individuals and companies that pay more tax than is required because they loved their countries.
If the corporate tax rate is 20%, and if the company pays 20% of its net profits in tax, then the stated net profits is correct, at least in most of the cases.
In addition, take note of the fact that some companies try to hide tax numbers by combing it with other expenses. If they have nothing to hide, there will be no hesitation for them to show it as a separate item. In general, I regard hiding tax value as a warning signal and shares of them should be avoided at all cost.
As a consequence of above, if a firm keep paying tax that is less than required tax rate year after year, it will be wise to sell off them. If the tax rate is 20% but the company seems to pay less than 20% continuously, then one need to take note.
Related posts:
I am to a great extent impressed with the article I have just read. I wish the writer of http://www.wisewealthbook.com can continue to provide so much worthwhile information and unforgettable experience to http://www.wisewealthbook.com readers. There is not much to tell except the following universal truth: Things are always in the last place u put them. I will be back.