Business Evaluation Based on Accounting Polices (Part 2)

In continuation of the topic of business evaluation based on accounting principles, Capital Corp Merchant Banking deems an analyst must understand that if any accounting practices are unearthed to inflate or deflate profit, it is highly likely these practices have been in place for some time.

A business has many objectives when accounting policies are chosen; the broad list below outlines some that would be applicable to almost any business.

-    Best Case Scenario – Company management wants to portray the business’s condition as clearly as possible. In other words, no efforts are made to “change” income and therefore comprehensive financial statements are arranged.

-    Chosen Account Representation – Commonly a minimal set of financial statements and tax returns are prepared to simply satisfy internal guidelines and tax purposes.  Such a policy could be due to a company being more concerned with showing higher/lower account balances which based on limited reporting is more challenging for an outsider to question.

-    Delay Income – A business may choose to avoid the necessity of reporting certain incomes by delaying the recognition of such until a future time.  Likely a tax purpose decision.

-    Increase Income – As a reverse to the previous, a business may also choose to increase their income recognition as much as possible in the interim to perhaps seem as an attractive venture to outside investors.  Also a tax purpose decision.

The next section of business evaluations based on accounting policies will further explain and detail some examples in practice to obtain the objectives above.

Respectfully,
Capital Corp Merchant Banking