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Accounting Allah shmoop industry sensitivity to changes in expenses as

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relates to profit margins All right make a rule I

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live by it Die by it If you're a plastic

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bottle bottle or stuffing everything inside plastic bottles from lemonade

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toe water to medicinal raccoon urine well then you have

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chosen one set of rules as to how you will

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expense various things on your balance sheet You'll have chosen

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to say Depreciate your bottling factories new mega plunger thing

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that cost one hundred million dollars and will be worth

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a ten million dollars in twenty years You declared initially

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that you would adopt straight line depreciation reducing its value

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four point five million dollars each year for those twenty

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years rights You're losing ninety million box over twenty years

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for half a year That's the rule That's the law

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you live by You can't change it Why would you

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even want to change it While everyone in management loves

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having Wall Street investors you know due to them many

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acts that are still today illegal in Kansas So let's

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say that business has been booming and Wall Street estimates

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for this year's earnings were eighty five cents a share

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You feel good about this year but not so good

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about next year In fact this year well it's likely

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that you'll print ninety four cents a share in earnings

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like a big beat by nine cents a share The

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fear you have then is that your stock price takes

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off and goes up from eighteen to twenty five on

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ly Tohave You then miss next year on the increased

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earnings estimates that you're friendly Wall Street analyst people will

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write up So instead of printing the dollar thirty is

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share they estimate Well in fact then next year you

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planned on ly printed Dollar twelve and your stock then

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plummets from that lofty twenty five dollars a share Only

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fifteen bucks You'd much prefer a smooth earnings growth curve

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So if you could control it in the good times

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you're having today you would quote appreciate unquote your plunger

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factory a little more aggressively so you could essentially depreciate

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zero of it next year when you could really use

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the notional earnings help This same chicken ary which is

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totally illegal by the way can be applied to the

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manner in which inventory is managed Accountant's must decide whether

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they're going to value the inventory they stock at market

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or at book value I'ii what the product would sell

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for today on eBay it fully dumped or what they

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paid for it Right Market versus BOOK The accounting industry

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carefully scrutinizes the notion that companies could suddenly change the

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way in which they value their inventory to accommodate the

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numbers they hope to publish to Opher bonding Wall Street

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community that is seeking mo mentum stocks in which they

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might make big quick money for everyone until they stop

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Yeah very small changes in the cost that a company

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attributes to their earnings calculations can have dramatic effect on

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the bottom line So a company seeking to change the

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rules of their accounting like changing that four and a

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half million years appreciation of the factory or different way

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of recognizing whether they use market value or book value

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to assess the quality of their raccoon urine storage stuff

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Yeah well if that happens they have to file all

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kinds of special paperwork with the S E C With

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myriad disclosures so that everybody knows what they're actually doing

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And it's not just trickery It has to be crystal

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clear that they're not In fact you know cooking the

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books that be legal and they all go to jail 00:03:26.68 --> [endTime] so don't do that

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