Here are 8 ways companies manipulate their profits:
1. Aggressive revenue recognition – The company records a fictitious sale or records a legitimate sale too soon.
2. Improper capitalization – The company converts a routine expense into an asset, spreading the cost over multiple periods.
3. Changing accounting methods – The company switches from LIFO to FIFO.
4. Changing estimates – The company changes the estimated useful life and salvage value for fixed assets, spreading the cost over a longer period of time and boosting profits today.
5. Changing the timing of events – The company sells an investment with an unrealized gain.
6. Altering business decisions – The company slashes R&D or postpones maintenance on equipment to make the company appear more profitable.
7. Related-party transactions – The company inflates profits through sham transactions with related parties.
8. M&A – The company frequently engages in acquisitions and pressures target firms to shift profits from the pre-merger period to the post-merger period.
So there you have it; 8 ways companies manipulate profits.
#shorts
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