ACP45 Loc: Rhode Island

Consider the following two statements:

1. According to the Wall Street Journal, 97% of listed companies are not using Generally Accepted Accounting Principles (GAAP) in releasing their profits, meaning basically they are cooking their books.

https://www.zerohedge.com/markets/wework-disaster-aftermath-97-companies-using-non-gaap-metrics-everything-f**e

https://www.zerohedge.com/markets/corporate-profits-are-worse-you-think

2. From The Daily Bell, consider the following information about the company Coca Cola:

“If we just go back a few years to 2010, Coca Cola’s annual revenue was $35 billion. By 2018 the company’s annual revenue had fallen to less than $32 billion. In 2010, Coca Cola generated $5.06 in profit (earnings) per share. In 2018, just $1.50. And Coca Cola’s total equity, i.e. the ‘net worth’ of the business, was $31 billion in 2010. By 2018, equity had fallen to $19 billion. So over the past eight years, Coca Cola has lost nearly 40% of its equity, sales are down, and per-share earnings have fallen by 70%. Clearly the company is in far worse shape today than it was eight years ago. Yet Coke’s share price has nearly DOUBLED in that period.”

https://www.thedailybell.com/all-articles/news-analysis/three-things-you-didnt-know-about-the-crash-of-1929/

We are living in a fantasy world, and it's going to get ugly out there. Batten down the hatches!

Wonttakeitanymore

Come can thank stirs f New York and other c*******t countries for limiting sugary drinks! The only reaso they got popular was because they added that little extra ingredient lol! Maybe they need a progressive organic coke! Choke

Canuckus Deploracus Loc: North of the wall

I don't find this shocking...

It is part of a trend...

Hopefully there will be no more bailouts...

Darwinian Economics anybody

Wonttakeitanymore

Canuckus Deploracus Loc: North of the wall

What c*******t country limits sugary drinks?

Pariahjf

This would probably apply to most businesses now-----they are not producing as much, and they are leveraging their own companies by buying back their own stocks to inflate the stock value.

Radiance3

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If they are not using GAAP, then they are certainly in violation of the generally accepted principles. GAAP is not the law itself. They are required to comply to provide credibility to their reporting process, and in compliance with the FASB(Financial Accounting Standard Board), that sets the standards.

The FASB creates specific guidelines that company accountants should follow when compiling and reporting information for financial statements or auditing purposes. These are also true to government financial operations on all standards of reporting. Our federal government, state, and local government, must comply with FASB standards of reporting.

When they violate the standard, specially for public trading companies, the SEC (Securities and Exchange Commission) enforces compliance.

An independent auditor's report contains an opinion as to whether the financial statements present fairly, in all material respects, an entity's financial position, results of operations, and cash flows in conformity with generally accepted accounting principles

Normally the most effective process of every company to meet the accurate measurement of income is the "Accrual basis" .When they use the cash basis on a daily operation, at year-end when financial statement is prepared, it is converted to accrual basis to meet the GAAP standards of reporting.

I think all those trading companies at Wall Street that are not in compliance, they are deceptive and in violations. The SEC will have to do something about that.

Another reason for following the GAAP is the IRS(Internal Revenue Service. How the income is measured. Without following the GAAP, then the companies' reporting income is not accurate. It could tend to income understated, thus tax liability is also understated. Or revenues earned, or expenses incurred not accurately reported. These are the reasons why companies/corporations must set the standards in compliance with GAAP, and auditors are legally required to adhere to those principles. Those who don't follow the professional guidelines, their CPA licences are revoked.
Remember the case of Enron?

permafrost Loc: Minnesota

Very good answer Radiance, thanks...

Radiance3

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I was an accountant and auditor perma, and I've done those jobs. Now, I am of course getting old. Happy Veterans Day. I hope we all unite and not fight. We must respect the office of the president. Thanks.

woodguru

The banking deregulation that went into effect when Clinton left the white house (yes it was a Clinton backed bad policy) changed the way asset values were shown on the bottom line of profit margins. By allowing the equity value during periods where property values were increasing, it allowed them to be reflected as income to the bottom line, thereby being used for increasing leverage amounts on the amount the bank could borrow, loan, and invest. It also allowed them to irresponsibly award huge bonuses based on a number that had nothing to do with real revenues.

I've always wondered why Clinton supported this, whether it was to sabotage the republican party, or he had financial ties that benefited from it.

woodguru

I have always respected the office of the president, which is why I object to a president being so abusive with the powers of the office. I do not subscribe to the belief that a president has unlimited powers, and definitely have a problem with one that prefers the counsel of dictators to our intelligence, state department, and pentagon.

Radiance3

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Woody, what abusive are you talking about? Fact of the matter is, president Trump is the most abused president in US history.
Despite of that, he loves all of us. He ensures that all are well provided thru his economic policies. He also ensures that we are all protected. Those are some of the most basic responsibilities he'd sworn into office, and he is delivering it. Peace be with you.

ACP45 Loc: Rhode Island

I don't doubt that you are correct, i.e. that public companies are supposed to file GAAP financial statements for the public to rely upon. However, perhaps you can explain to me the following paragraph in the cited article:

"However, it is not our intention here to focus on WeWork's f**e financials - we did that last August. Instead, it's to point out that there is never just one cockroach. In fact, when it comes to non-GAAP adjustments, and "f**e numbers", one can say that everyone is a cockroach: as the WSJ points out, nearly all big companies now use at least one non-GAAP financial metric. Last year, 97% of S&P 500 companies used non-GAAP metrics, up from 59% in 1996, according Audit Analytics.

Which begs the question: in the aftermath of the WeWork fiasco, which relied exclusively on non-GAAP, "community" adjustments to make its financials appear respectable even though fundamentally they were a disaster, is every financial report - and with 97% out of all companies using non-GAAP metrics one can be excused to use the term "ever" - nothing but f**e financial news, and when the veil is finally lifted, as was the case with We Work, what will happen to all those trillions in market capitalization built upon "one-time", "non-recurring" addbacks and pro forma, adjusted, recasted and otherwise f**e foundations?"

Is the SEC simply not doing it's job? Are bank lending money based upon non-GAAP financial statements? What is the explanation for the WSJ contention that 97% of all companies use non-GAAP metrics? How can this be happening?

Radiance3

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Here are my reasons for these changes.
I can’t believe these deviations from the principles of GAAP are commonly happening now. The most accurate measurement is the GAAP. During my time in the 80’s and 90’s, I never encountered this other method called ACBOA (Other Comprehensive Basis of Accounting).

Apparently, I think this method is now approved by the SEC. Their reason is easier to understand as compared to the GAAP requirement. Both of these methods provide a comprehensive look of the company’s operations, or individuals including income, expenses, cash flows, assets and liabilities.
The professional accounting operations must always be compiled thru the GAAP application.

However, theJournal of Accountancy reports that certain situations require reporting of financial statements under other comprehensive basis of accounting, the ACBOA, which takes less cost to prepare.

The ACBOA however, require a statement of CASH FLOW, to ensure that the cash flow reconciles with the cash assets represented in the balance sheet.

This type of operation is most common on banks, lending institution, borrowers or debtors, and the construction companies like the WeWorks.

Why are Cash Flow Statement being important? Banks present their statements insuring the solvency of their operations. Likewise, the debtors or investors before they could borrow money from the bank must present a financial statement. It can be both prepared under GAAP or the ACBOA. With this requirement, they are also required to present a statement of cash flow, to provide the picture of the ongoing operation and ability to pay the debts.

Therefore, I now understand why many companies at present use ACBOA as a basis of Accounting.

Radiance3

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In essence this assessment of higher value of assets and equity must still comply with GAAP operations. Raising of equity values does not provide permanent stability. However, it could provide a good financial statement that could present the ability to meeting financial obligations to lenders.

If this method was done to enhance the reputation of the elected officers, I would not advise to relying solely on that report because the values of property may not be stable.
E.g. In 2001-2005, democrats demand banks to allowing loan to low income to avoid discrimination.

E.g. The recession in 2007-2008-2009. These years have drastic effects downgrading values of homes and real estate particularly the homes bought during the 2005-06 where in the sub-prime lending was used. In other words the sub-prime did not require higher standards of credit ratings of the borrowers.
Low income and minorities were able to obtain this type of loans because the credit requirement standards were lowered for them. Thus millions of those low income were able to buy homes. After a year, millions of homes foreclosed cause they were not able to pay the loans, thus thousands of banks who allowed the sub-prime loan became bankrupt. Thus we have the recession 2007-2008-2009.

During the earlier 80's banks normally require that liabilities of the borrowers must not be more than 35% of their income.

Here’s what debt to asset ratio means:
When you’re a business i.e. you have your own business, your debt to asset ratio represents the total amount of debt you owe compared to your total income.

This determines how much lenders will be willing to lend you, so be aware of how much you owe to creditors.

If you’re an individual, the debt to asset ratio won’t be as relevant to you, but your debt to INCOME ratio will be. That’s the number representing the total amount of debt you owe compared to your income. E.g. 35% of our debts to income is required to obtain a lawn for buying homes.

Mortgage lenders, bank loans, and anyone giving you credit will take a look at your debt to asset-income ratio in order to determine how much they’re willing to lend to you.