The sun is setting on 2012 and your books don?t look quite the way you?d like. Maybe you have too much profit ? maybe not enough. You need financial statements that reflect reality, position you for?profits in the new year and perhaps even impress your banker or pay less tax. But how?
Fortunately, accounting rules allow flexibility: It may seem like walking a thin line but there are plenty of ways you can change your financial reporting to produce ?better looking? ? and truly more meaningful ? financial statements without ever straying into legal or ethical problems.
Let?s take a look at six situations when we have legitimate choices that significantly change our financial statements.
1.?Capitalizing Expenses
The most common way to increase a company?s apparent profitability is to shift expenses off of the P&L and onto the balance sheet. When a business makes a large purchase, it could decide the cost should be ?capitalized? ? meaning to create an asset rather than an expense. This spreads the cost across many periods (as depreciation) and increases short term profits.
There are times when capitalizing an expense is not only correct, but required.? Some costs, like leasehold improvements (building new walls in a rented office, for example), are correctly classified as an asset.? Other times, the rules are not so clear. A new phone system is clearly an asset, but how about the cost to install it and to train the staff??If the training is listed as ?free? on the contract, should we expense the value of training anyway?
The decision to capitalize expenses works both ways: increasing or decreasing expenses in one period, and increasing or decreasing assets and depreciation costs over the long term.?Capitalizing or expensing an item can be a strategic decision that impacts profits, taxes and other areas of business.
2. Time Shifting Income and Expenses
Accountants try to wrap up all the transactions in a single month or year and call that period ?closed?. But business transactions can?t be so neatly packaged. Sales and spending continue past the end of each month or year, so there is always a temptation to fudge the dates on some transactions and force them into prior or later periods.
There are some good, legitimate reasons to do this, including simply correcting quirks in the calendar.? A power bill for example, is a monthly expense.? If we do not receive the February power bill until March 1, that?s no reason to skip the expense in February.? Clearly, the February P&L should contain an expense for power, so adjusting the date on the bill is a reasonable and legitimate use of this technique.
For internal reporting ? that is, when financial statements are prepared for management and not used for tax or other external purposes ? time shifting can be an important way to smooth out revenue and expenses on periodic reports.? It can be difficult to manage a business when several large invoices land arbitrarily in one month, so assigning part or all of the expense to another month may help make sense of what is actually going on in the business.
3. Changing Reporting Periods
One month or year can show a loss, while the next shows an extreme profit.? That?s the nature of business.? In order to generate reports that show more consistency, managers may elect not to report on a strict calendar year but instead look at a more representative period, such as the last 12 months (sometimes called TTM ? trailing twelve months).? This is a respected way to characterize financial results, for example, in a fast-growing company, or toward the end of one period when the last period?s data would be out of date.
Some businesses have such variability in their monthly results that they skip monthly reports altogether and look only at quarterly results.? This makes it difficult to make real time decisions, but if the reporting is more accurate on a quarterly basis it could be a good move.
4. Revenue Recognition
Businesses with multi-month delivery cycles and big invoice values are expected ? even required ? ?to spread income out as it is earned, rather than showing it all in the month when an invoice was created. GAAP has some rules about this based on measuring the work actually completed during a period. Consult with a CFO or CPA about how to measure this!
5. Inventory Valuation
Inventory is one area where small changes in recording can have large impacts on the financial statements.? Old inventory can be ?written down? ? meaning it is devalued or discounted ? simply because it is old.? The thought is that last year?s models left in inventory are not worth as much as this year?s.? Writing down inventory is an accepted way to take an expense in the current period and adjust the cost of goods for future sales.
6. Inventory Expense Recognition
When a company sells a product from inventory, profit depends on how we calculate and recognize the cost of goods sold?(COGS).? Should we value it at the price we paid for the oldest part of it? Or the price we paid most recently for the newest pieces? Or at the price we will pay to replace it next week?
There are generally accepted rules for guiding this decision, and it is important to remain consistent.? Which method you choose ? and if you choose to change the method ? can have a substantial impact on profitability since it will shift the cost of goods.
Make the Data Useful
There are plenty of legitimate reasons for changing the way we record things on our books. The rules of Generally Accepted Accounting Principles (GAAP) provide enough flexibility to push and mold our financial statements into useful reports.
Note that I said ?useful reports?. ?I did not say tax or regulatory filings. If your business is submitting formal financial statements for legal or tax purposes, a thorough review from a knowledgeable CPA or tax attorney is always the right move.
In the meantime, remember that financial reports are meant to help you make better business decisions.? Financial statements that are knowingly false, twist reality beyond recognition, or are based on wants instead of facts, will not give you meaningful information.
Dedicated to your (Year End) profits, ?David
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Source: http://rocksolidfinance.com/pay_less_tax_with_better_financials/
john kerry eastbay Samantha Steele Dec 21 2012 doomsday Is The World Going To End Mayans
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