CONCLUSION
Despite the critical importance of measuring profit, businesspeople cannot produce a definition that is satisfactory in every situation.
Even the simple formula of revenue minus costs founders on the malleability of accountingbased revenues and costs. As Chapters 6 and 7 demonstrate, these basic measures of corporate performance are far too subject to manipulation and distortion to be taken at face value. Also, our brief discussions of real estate and leveraged buyouts show that net earnings can be calculated in perfect accordance with GAAP, yet bear little relation to an investor’s rate of return.In light of such observations, financial analysts must walk a fine line. On the one hand, they must not lose touch with economic reality by hewing to accounting orthodoxy. On the other hand, they must not accept the version of reality that seekers of cheap capital would like to foist on them. Analysts should be skeptical of claims that a business’s alleged “costs” are mere accounting conventions and that anyone who believes otherwise is a fuddy-duddy.
Source:
Fridson M., Alvarez F.. Financial Statement Analysis. John Wiley & Sons, Inc.,2002. — 413 p. 2002
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