Score one for Mr. Sigmund! {g}
Todd,
Your grasp of GAAP is very good. I agree with your concern about JAKKS, and also agree that THQ is totally proper in their accounting treatment.
Companies are required to publish 3 main reports: a balance sheet, and income statement, and a cash flow statement. All three are important.
The cash flow statement adjusts out accruals and deferrals to show what the gains/losses in cash were during the period.
The income statement is used to match current period revenue and expenses to determine the increase in worth in the company in the period. Companies build assets and liabilities each period, even though they don't also pay or collect them immediately. Inventory, A/R, A/P, wages payable are all examples of "accrual" accounts that are necessary to adjust for timing of cash movement.
As Todd says, in the long run, these two measures should correlate. If you see a company posting big profits with no positive cash flow, it is because they are sinking their free cash flow into other assets, such as inventory, receivables, etc. Not necessarily a bad thing, but watch it closely. Valuing inventory, collectibility of receivables, potential warranty claims, prepaid assets, etc. requires the use of estimates which management can be aggressive with.
As I've said in previous posts, IMO, THQ is definitely not in an aggressive accounting position at the present time. If anytime, they are very conservative, especially with the level of reserves for return of product.
Now where are those earnings? {g}
Kory |
