What You Will Learn
- The importance of understanding the language of business and investing
- How to detect aggresive and conservative accounting and why it can save you from investing in losers
Aggressive and Conservative Accounting Series
For other articles in the series, click on the links below.
- Aggressive and Conservative Accounting Policies
- How to Detect Aggressive Revenue Recognition Policy
- FIFO LIFO Inventory Valuation Methods
- Straight Line and Accelerated Depreciation Methods
- Aggressive Accounting: Reserves, Allowances, Contingent Liabilities
- How Companies Misuse Capitalizing of Expenses
How to sniff out Aggressive Conservative Accounting
Lacking formal training in accounting, I always have a desire to learn more and get better at accounting. Accounting is a skill that you can never be good enough at. It is also one of the greatest skill any investor can obtain as it allows you to view the investment from both an accounting and business point of view.
By accounting, I do not just mean learning how to balance entries in the financial statements and figuring out what goes where, but I am always looking to find new methods of analysis to detect creative accounting and the methods management can take in order to make their company look better than it really is.
GAAP and its Issues
All financial statements are prepared according to Generally Accepted Accounting Principals (GAAP). The key word is “Generally” which means that there is a variety of alternative policies and procedures the company can use in creating its financial statements.
The selection of accounting policies can tell you a lot about management and the company. Whether it is being conservative or aggressive. Whether earnings is being recognized quickly to show growth when in fact it has not happened, or whether earnings is being deferred / reserved for a rainy day.
Alternative Accounting Policies and Procedures
Here is a table listing the alternative accounting policies management can choose from.
Next time you read the annual reports, go over the accounting policies and compare with competitors to see whether the accounting policies are in line with industry standards.
In the coming series, I will take a look at the accounting policies to discuss how it can be use creatively by management in financial reporting.