Manipulating Earnings
Manipulating earnings has become a consistent problem among variouscompanies trying to improve their financial status. This might also becomequite a problem among traders trying to look for the best companies out there.And since quite a lot of companies may be guilty of bending the rules when itcomes to earnings and revenues now and then, this has remained a challengeamong investors to seek out a better outlook of certain businesses.
What can help traders and investors better gauge companies despite certainearnings manipulation tactics is by knowing what they are and how they arebeing done. This might help them determine which businesses may be bending therules a little bit farther than the others that might actually lead to damagingconsequences. Here are some of the ways that many companies may use tomanipulate earnings that investors and traders should be aware about.
Accelerated Revenues
Some companies accelerate revenues by reporting lump sum payments forservice contracts that may extend for a certain number of years. Another waysome companies may do this is by considering certain shipments to distributorsas outright sales although there might be chances of having them returned asunsold merchandise.
Use Of Non-Recurring Expenses
Non-recurring expenses are usually one-time expenses that accounted forcertain extraordinary events. They do not usually made as regular expensescompanies make annually. And because of its nature, some companies may use itto manipulate earnings.
Companies usually take certain non-recurring expenses each year and reserveda certain amount for it as expenses. After a couple of quarters, companies mayrealize that they may have reserved too much and may be able to put somethingback as income, boosting earnings in the process artificially.
Manipulating Other Expenses
Because of its somewhat dubious title, many companies may take advantage ofthis category to either book excess reserves or hide their other expenses.Either way, companies may be able to manipulate their earnings to make themlook better that they actually are.
Marking Items Off The Balance Sheet
Some companies can make off-balance sheet entries by sometimes creatingseparate legal entities to hold certain liabilities in place of the parentcompany. It can be a certain subsidiary not wholly owned by the parent companybut can hold certain liabilities well enough for them to clear or affect thefinancial statement. This way, they can be effectively hidden from investorsand make companies look better than they really are.