I studied cost rather than financial accounting, and also wrote two multi-currency accounting programs for an EU based companies before the creation of the Euro, so I probably do not have quite your credentials.
But cashed based accounting can be very misleading too. Imagine a small business with a million dollar line of credit at 5% interests. To keep what follow simple I will imagine simple interest even though interested is always compounded in the real world. So they borrow $10,000 with requirement to pay it back over ten years. So in first year they have borrowed $10,000. They will have to pay back $1,000 in principle plus $500 in interest. So have $8,500 left. So they buy $8,500 worth of goods for resale, and sell it for $8,000 and have spend $1,000 on various other expenses. So they have clearly lost money, but their cash flow was a postivie $7,000. Next year they can borrow $15,000 and end up with an even bigger actual loss and an even bigger positive cash flow. It will catch up with them eventually. And this kind of thing in the real world requires some fancy footwork to hide the loss. But in the real world there have been non-financial small and medium businesses who get away with this sort of thing for five or six years before it catches up with them and the business goes under, or if enough was taken by these means someone flees the country. The point is, it can only be caught quickly by accrual accounting. ON a cash flow only basis they could skip much of the fancy footwork. On Sun, Nov 6, 2011 at 9:28 AM, Eugene Coyle <[email protected]> wrote: > I studied financial accounting in the graduate biz school at NYU. What I > remember from the course came from a student question and the instructor's > answer. > The instructor had been lecturing on the tax books and the shareholder books, > etc. The student asked "Which are the real books?" The answer, after a > brief pause: > "Oh, the real books are upstairs." In other words, Sabri, I agree with you. > > Gene > > On Nov 6, 2011, at 9:20 AM, Sabri Oncu wrote: > >> There is a large earnings management literature in accounting devoted >> to the study of accruals. Depending on how the accruals are reported >> the reported earnings change. Another thing that can be managed in >> addition to the accruals are the loss reserves for banks and insurance >> companies and the list continiues. Cash-flow based measures are always >> better than accrual based measures in my view. Also, if the >> denominator contains values of some intangible assets such as >> goodwill, brands and the like, the measured profits get noisier. >> >> Best, >> Sabri >> >> On 11/5/11, Sabri Oncu <[email protected]> wrote: >>> Shane: >>> >>>> The measure of (in Marxian terms) "profit" comprises, on an after-tax >>>> basis: net rental income, net interest income, total executive salaries, >>>> total dividend income, and (net of properly computed capital >>>> consumption) >>>> corporate retained earnings. >>> >>> For us mathematicians such words as "properly computed" are vague. >>> >>> What does "properly computed" mean? >>> >>> I am sure lawyers and regulators can find an answer. If you don't >>> believe me, just read Basel I, II and III or GAAP (Generally Accepted >>> Accounting Principles). >>> >>> Best, >>> Sabri >>> >> _______________________________________________ >> pen-l mailing list >> [email protected] >> https://lists.csuchico.edu/mailman/listinfo/pen-l > > _______________________________________________ > pen-l mailing list > [email protected] > https://lists.csuchico.edu/mailman/listinfo/pen-l > -- Facebook: Gar Lipow Twitter: GarLipow Grist Blog: http://www.grist.org/member/1598 Static page: http://www.nohairshirts.com _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
