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Strategies & Market Trends : ahhaha's ahs -- Ignore unavailable to you. Want to Upgrade?

To: ahhaha who wrote (4680)	7/2/2002 4:41:12 PM
From: GraceZ	Read Replies (2) \| Respond to of 24758

Actually I always thought that the origin came from an attempt to keep track of your original investment in income producing property, apart from the expense associated with operating that property. A business always has a start up expense, even mine which was started in a rented basement with a hundred dollar enlarger. But suppose instead I'd had 300k and wanted to buy the state of the art to start that business. I buy the equipment and the customers show up. If I think in terms of being underwater by 300k, I might quit right there. So I tell myself I have spent 300k and I have 300k on the books as a tangible asset (not unlike principle on a bond that pays interest). Now as the jobs come in, I keep track of revs minus expenses associated with doing that job and now I know why I'm working....profit! I know how to price my product. The excess after all expenses are deducted is the return on my original investment (the 300k). This is the biggest reason you separate out capital equipment from expenses from operations. You need to know if you are making money from your operations and money from your original investment in capital equipment. OTOH I agree with your distaste with the tax code because it does cause an enormous distortion in the way people allocate capital. You are no longer simply making decisions based on what you need to do to make money, but what you need to do to minimize taxes while still trying to make money.

To: ahhaha who wrote (4680)	7/2/2002 4:57:31 PM
From: Keith Monahan	Read Replies (1) \| Respond to of 24758

Please try to argue your position though, because I want to show what fraud accountancy has been forced to embrace by tax collecting governments. What exactly are they being forced to embrace? If the accountants want to change the standards and treat capital as a cost in the period incurred then they should do it. The adjustments can then be made for tax reporting. I am not arguing in favor of distributing capital costs over time. In fact, I think it is a terrible idea. Management is not held fully accountable for the spending on large capital projects. Since the P&L impact is deferred, these mega-projects never seem to get the scrutiny they should. Then you end up with big writeoffs for failed projects.

To: ahhaha who wrote (4680)	7/4/2002 1:56:08 AM
From: frankw1900	Respond to of 24758

Taxes and bookkeeping. (Comment about Verizon is provocative): dotcomscoop.com Media Confusion: WorldCom Did Not Overstate Cash Flow By Robert Lee Special to DotcomScoop.com Myriad print and broadcast media seem to be confused about what WorldCom did. WorldCom did not OVERSTATE cash flow. What WorldCom did, ironically, was to UNDERSTATE cash flow precisely by the amount of the needless income tax they paid. And if they paid taxes based on the same bookkeeping entries they made for their statements, they actually paid out hundreds of millions of dollars in taxes they did not have to. Here is how it works in accounting: Cash Flow is NOT EBITDA. Cash flow is simply the amount by which the cash goes up or down in a given period. There are two ways to affect cash. You write a check or you receive a check. EBITDA is in my mind a minimally valuable parameter. Because it is so misunderstood by the lay public it should not be published. Or it should come with a warning from the FDA. EBITDA is a complex mixture of cash flow concepts and earnings concepts. It is one thing to talk about earnings before the positive effects of depreciation and amortization (they reduce profits but they increase cash flow by the amount of the taxes they shelter) but it is another to talk about earnings before the real expense of interest. What is the sense for most analyses of wondering how much money you would have had if you did not have to pay the current portion of your debt? The fact is that you do have to pay that portion of the debt. Further, if the issue is how much money do you have with which to pay your debt (or any other distribution that must be made) what is the sense of using a calculation that does not at all reflect the cash you have on hand? Depreciation and amortization add to your cash by sheltering taxes. WorldCom wrote checks for expenses. These operating expenses were in reality tax deductible. If WorldCom had accounted for these distributions as expenses the amounts of the distributions would have been deducted from revenues and would have lowered GAAP (General Accepted Accounting Principles) profits, hence would have lowered taxes. But they did not account for them as expenses. Instead WorldCom capitalized them. Capitalizing is accounting lingo for saying that the amount you paid is not an expense but rather a trade of cash for an asset of equal value. Therefore you are not allowed to deduct this amount from your revenue as an expense. The amount of the distribution becomes an asset. GAAP allows you to depreciate it over time. The gradual annual amount of the depreciation is then deducted from your revenue (the D in EBITDA) from your revenue even though there is no contemporaneous distribution of funds. When you account for a distribution as a capital distribution you maximize GAAP profits in that year and you incur tax bills you would not have to pay if you expensed them. If the depreciation schedule is 10 years it takes 10 years to get back the taxes that you paid in the year you capitalized the distribution. This is what WorldCom did. Thus what they did was to reduce their cash flow. You could talk for hours on whether to gauge capital intensive companies like telcos on GAAP profits or cash flow. For example, real estate has NO concept of GAAP “profits”. All real estate is judge on the basis of cash flow. You have no notion of “profit” until you sell the building! I own Comcast. I own it with no regard for GAAP profits. Comcast can create or destroy profits at will. All they have to do is depreciate their assets faster or slower. Faster destroys profits but is much more conservative, while companies like Verizon slow down depreciation increasing profits, the deception of which does not come home to roost until the day that it does (and that day is certainly within the next year or two, if not before). Mario Puzo, in one of his lesser known books, had a character named Grunwald say, “You gotta get rich in the dark.” At the end of the year the winner is not the guy with the highest profits; it is the guy with the most money. And the guy with the most money is the guy with the lowest profits because profits imply taxes. This is the irony of going public. When you have a private business you have no one to impress so you do everything you can to minimize profits. You massage your expenses upward, prepaying expenses. You get accounts receivable checks at the end of the year and you put them in a drawer and do not deposit them until after the first of the year (if you are on a cash basis). If you are on an accrual basis you deposit as much money as you can as deposits for work in progress. You recognize it as sales only when you have to. You do everything you can do to understate profits and overstate expenses. But when you go public you do everything you can do to invent profits because the lay public (which, we are told, operates at the eighth grade level) does not understand very much other than the magic word “profits”. I have listened to financial conference calls in which well-known analysts from supposedly high quality firms betray with their repeated and naïve bleating questions that they have not a clue about the simplest accounting issues. One final point relating to cash flow: When one examine cash flow statements it is important to go back to the balance sheet to look at the age and ratio of the payables to sales. This is because it is easy to increase cash flow by simply not paying all the bills you should in a period. One also needs to look at the age of the receivables. You can increase cash flow without increasing sales or profit by simply collecting old receivables, so you look at the relative DSO (days sales outstanding). I leave you with a joke. It is about the CEO interviewing accountants. He asks each one what 2+2 equals. The losers say, “4!” The winner says, “What did you have in mind?” About the author Robert Lee is a private investor who founded, ran, and sold to public companies two businesses. The first was a Subaru distributorship, responsible for distribution of Subaru automobiles to dealers in three states. The second was Lee Data Systems, a developer and value added reseller of practice management systems for physicians. The first company was sold to Fuji Heavy Industries; the second to WebMD. He is currently exceedingly over-weighted in distressed telecom stocks and bonds and believes that to a large degree (note the wiggle room) diversification is an excuse. The great fortunes of the world were extraordinarily undiversified. The trick is to get in low. If you do not get in low you cannot get out high. His grandmother told him that when he was 12.