They do follow GAAP, and that includes all the exceptions and charges.
What you can do is use the EVA method (http://www.alltheweb.com/cgi-bin/search?exec=FAST+Search&type=all&query=%22eva+method%22), which will take you longer, since you have to prepare your own journal/calculations. So far research indicates that investors earn more when using this method.
GAAP may still work for the very short term, for example if you want to figure out whther XYZ will go bankrupt within 30 days. But asides that, I'll use EVA.
___ Example of fair GAAP games:
Mgmt. may change the % of future expected expense, such as lawsuits. If you put the number unusually high, you can make it lower when earnings are bad. (Ex: Out of $500M income, you put 10%, or $50 into product liability reserves. When earnings come short, you say "oh, I think 10% is too high. Let's make it 5%." Bottom line: Add $25 to earnings.)
Another one is when you have a lomp-sum charge against earnings. Now if it's legitimate, such as closing of stores, I'll say it's OK. But, the question arises when the charge is against items that will still cotribute to earnings in the future. This charge, for ex. by reducing the value of property, may reduce depreciation (increase NI).
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PLEASE double-check accuracy. I may be wrong. |
