Accounting Cushion

  

Think about it like the squirrel socking away nuts in good times, knowing that bad times are always around the corner. Now mash up this concept with one of the precepts of GAAP, which is to always be conservative when stating profits.

Companies often purposely overstate expenses to make profits look slightly less awesome in good times, so that when the baddies hit, the downside isn't so awful. Investors appreciate the relative stability of this exercise, and accountants have gotten creative through the years with myriad methods of overstating expenses, from pre-ordering inventory, to overstating the allowance for bed debts, to fully funding (and then some) the employee pension fund. There has almost never been an action against a company for being too conservative in their accounting.

Related or Semi-related Video

Finance: What is GAAP?21 Views

00:00

Finance allah shmoop what is a gap Yeah not this

00:09

Nor this Nor this gap is an accounting term that

00:13

stands for generally accepted accounting principles And it is basically

00:18

the accounting code of hammurabi or the ten commandments that

00:22

is There are lots and lots and lots of ways

00:24

that clever bean counters could define and or account for

00:28

the notion of profits lots of ways to recognize revenues

00:32

versus sales and lots of ways to think about how

00:34

much that ten commandment frisbee factory is appreciating in value

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each year Well the world according to gaff outlines the

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structure under which accountants must you know count beans the

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basic idea Well sort of in the vein of the

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golden rule that is do unto others as you'd have

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them do unto you Gap requires that accountants always present

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their numbers in the most reasonably conservative manner possible such

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that they never overstate how profitable or how well the

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company is doing Gap is the framework the map the

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religion and the destinations we want to go inside this

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neck of the accounting woods are three income statement cash

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flow statement balance sheet will none of these three key

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elements mean anything however unless they all follow the same

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rules they're linked like gears in an overpriced swiss watch

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and the eighteen zillion individual rules on their own mean

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nothing like what is revenue Is it a dollar you

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collect in cash at a video game arcade booth Is

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it the promise to pay that dollar in a year

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Well there are lots of ways to account for this

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notion of revenue so don't think of gaff isa siri's

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of rules rather think of it as this you know

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key mathey kind of finance e a county religion it's

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all about quote doing right unquote and part of that

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issue is a natural conservatism that has to come with

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it kind of amish you'd think would be a good

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gap Accountants Well if you're thinking about how to account

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for five dollars promised to you in a year well

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you have to recognize that there is risk you won't

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collect it and that money a year from now is

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worth less than its face value and well that you

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should categorise those revenues way off in the distance differently

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from how you'd categorize collecting the five dollar bill in

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cash that day and putting it in your cigar box

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there right So gap is basically the force in accounting 00:02:26.44 --> [endTime] May it be with you

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