Accounting Weaknesses

You would studied limitation of Accounting. Actually all these limitations become the accounting weaknesses. On these weaknesses, corrupt business leader takes the benefit by misusing the fund by doing big accounting scandals. So, all investors should also aware all these accounting weaknesses.

Recently, I visited the pdf file of university of Pretoria etd where I found some interesting point, some of them, I am mentioning here.

1. # A focus on earnings leads to a manipulation of accounting policies that maximizes earnings. Some companies resort to a practice, called trade loading or channel stuffing to improve sales and earnings.

2.  # One of Accounting weakness is that accountant can easily change the amount of income or expenses by changing the method of depreciation or inventory evaluation. So, today, economic model is more important where cash inflow and cash outflow is checked by decision makers.

3. # Showing of Goodwill also creats many weakness in accounting because goodwill is usually written off against earning over the period and it decreases earning but goodwill is not deductible for tax. So, other side it does not affect cash flow. So, net cash flow from operation will not match with accounting profit. So, decision maker may be confused which profit he should take for checking performance of company.

4. # The helpfulness of accounting measures such as earnings, EPS, earning growth, dividends and ROE has been criticized with growing intensity for some time. Earnings, earning per share and earning growth are misleading measures of corporate performance. Many investors are fooled by accounting shenanigans but the investors who matter, are not."


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Accounting Education: Accounting Weaknesses
Accounting Weaknesses
Accounting Education
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