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Gold/Mining/Energy : Century Mining Corporation
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To: John McCarthy who wrote (437)6/20/2007 10:13:24 AM
From: FreedomForAll  Read Replies (1) of 545
 
H3 and John,

As I understand it, Peggy's accountants are taking a current cash cost and saying that it really isn't a current expense (and they are calling it a reserve.) But in the context of John's example this becomes confusing because it is not like John's example "reserve". It is instead more like a prepaid expense which, for P&L purposes should be expensed in the period when the benefit of the expense is "used up". One could assume that in the CMM case that would be when the revenues come in that the expense helped to create.
A simpler example would be if H3's mining/investment firm could prepay the rent on their offices for 5 years (presumably to lock in a lower rent rate.) For cash flow purposes it hits H3's bank account right away and his CF statement would show it as such. On H3's P&L the rent expense would only be the amount for the current period, and the rest of that rent would go to the asset side of the balance sheet as "prepaid rent." (This has the effect of increasing the current period "Net Income Before Taxes" correctly since most of the rent is for periods in the future.) Then as time passes, each year the P&L would show a "rent expense" (debit to expense) and the Balance sheet would show an equal amount (credit to the asset) to reduce the "prepaid rent." This reduces future years "Net Income before Taxes" correctly since the rent paid in the past is used up in future years as an expense in those years.
Sorry if this example is insultingly elementary; it's not intended that way.

freedom
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