PAGE18MASTEREXHIBITNEEDSTOBEUNDERSTOOD

Whatarethedifferenttypesoflegalorganizationforabusiness?
Wewanttoknowwhereacompanyhasbeenandwhereacompanyisgoing.

securitiesanalysis
analyzingstock
analyzingdebt
competitiveadvantage/disadvantage
domesticandinternationaldevelopments
businesscombinationpossiblities

1)STARTINGWITHCASHFLOWS
regularprofit+goodfinancialconditionwhichleadstoaccesstocapitalistheresultofgood
management

cashflowsofmakingprofit
cashinflowfromsales
cashoutflowsforexpenses

cashflowsofthebusiness
raisingcapital,investingcapital,distributingprofittoowners

netresultofprofitmakingcashflows>importantnumber

cashdecreaseandreasonsforitareveryimportantbutyoustilldonotknow

1.profitearnedorlosssuffered
2.financialconditionofthebusiness

NETCASHFLOWFROMPROFITMAKINGOPERATIONSDURINGTHEYEARDOESNOT
EQUALPROFITFORTHEYEAR

howmuchcashdoesthebusinesshaveattheendoftheyear?
cashflowsdonottellyou

Productsforthisco.aresoldoncredit

$10,225,000collectedfromcustomersduringtheyear
thisincludessalesmadeinthepreviousyearandexcludessalesmadethisyearthathavenot
yetbeencollected

receivablessalesmadetocustomersneartheendoftheyearthatwillbecollectedat
thestartofthenextyear


TOTALCASHCOLLECTEDDURINGTHEYEAR!=SALESREVFORTHEYEAR

7.13Minmanufacturingcostsbut
onlycostofproductsturnedintocashshouldbeusedinfiguringaccounting

liabilitiesforrecentpurchasesandmanufacturingcosts

2)INTRODUCINGTHEBALANCESHEETANDINCOMESTATEMENT
oneneedstoknowfinancialconditionandprofitperformanceofabusiness

finstatements/financials:
bs,is,cfs+footnotesandsupportingschedules

finreport:
financials+narrative+graphics+additionalfootnotesandschedules

incomestatement
asummaryofsalesrevenueandexpensesforaperiodoftime

salesrevenue
topline.Incomefromsalestocustomers.

netincome
bottomline.finalprofitafterallexpensesaredeductedfromsalesrevenue

grossmargin
salesrevenuecostofgoodssold

operatingearnings(EBITorearningsbeforeinterestandtax)
grossmarginoperatingexpensesdepreciation

earningsbeforeincometax
EBITinterestexpenseondebt

netincome
EBITinterestexpenseondebtincometaxes

DEFINITIONS:

salesrevenue$receivedortobereceivedfromsalesofproducts/services.Salesand
excisetaxesnotincluded.


COGSexpensetotalcostofgoodssoldtocustomers.Inventoryshrinkageiemissinggoods
orshopliftedgoodsmaybeincludedinCOGSorinoperatingexpense.

operatingexpenseeverythingotherthanCOGS,interestandincometax.Mayinclude:
salaries,legalfees,advertising,marketing.

depreciationexpenseportionoforiginalcostsoflongtermassetstobeexpensedinone
period.Chargeforusingfixedgoodsforoneperiod.

balancesheet
leftsidehasassetswhilerightsidehasliabilitiesandequityrestsbelowliabilities(WHY?)

everyaccounthasatitleandadollaramountcalledthebalance

iftheincomestatementisfortheyearendingonJune30,2001thebsispreparedatmidnight
ofthatday

currentassetscashandotherassetstobeconvertedintocashinoneoperatingcycle.
Assetsnotrequiredintheoperatingcycleareincludedincurrentassetsiftheywillbe
convertedintocashduringthecomingyear.
prepaidexpensesareincludedinCA

amountofdepreciationforoneyearisreportedasanexpenseintheincomestatement
balanceinaccumulateddepreciationaccountisdeductedfromoriginalcostoffixedassets

liabilitiesarereportedinbalancesheettofigureoutwherethecompanysassetscamefrom

twoequitysources:
1.capitalstock(increaseswhenownersinvestinthebusiness)
2.retainedearnings(thisisnotanasset)

3)PROFITISNTEVERYTHING
managersmustearnadequateprofit,preventcashshortages,controlassetsandliabilities

CFOisresponsibleforfinconditionandcashflow
managersareresponsibleforsalesandexpenses

4)SALESREVENUE(IS)ANDACCOUNTSRECEIVABLE(BS)
businessmakessalesoncredit

creditcreatescashinflowlag.Theamountoflagisintheaccountsreceivablebalance.

theaveragecustomerwaits5weekstopaythecompanythus5weeksworthofsaleswere
uncollectedatyearsend(1M)

accountsreceivableturnoverratiosalesrevenue/accountsreceivable

averagesalescreditperiod52/accountsreceivableturnoverratio
amountofweeksworthofrevenuetiedupinAR

todecreaseASCP:shortencreditterms,shutoffcredit,expeditecollectionefforts

capitalhasacost.IfARaretoohigh,toomuchdebtisbeingdeployedorequityisbeing
inefficientlyused.

amajorchangeintheASCPmaysignalabigchangeincompanypolicy

5)COGS(IS)ANDINVENTORY(BS)
grossmarginsalesrevenueCOGS
grossmarginonsalesrevenuegrossmargin/salesrevenue

mostcompanieshaveagrossmarginbetween20%and50%

INVENTORYISREPORTEDATCOSTINTHEBALANCESHEETNOTSALESVALUE

1.69Misthecostofproductsawaitingsalenextyear
6.76Misthecostofproductsthatweresold(notonhandinyearendinventory)

averageinventoryholdingperiodproductionprocesstimeandwarehousestoragetime
[52/inventoryturnoverratio]

averageinventoryholdingperiod*COGS=inventoryatendofyear

AIHPdeterminessizeofinventoryrelativetoannualCOGS

inventoryturnoverratioCOGS/inventory

iftheAIHPislongerthannecessary,toomuchcapitalisbeingtiedupininventory

reducingAIHPfrom13to10weeks,freesup$390,000worthofcapital

costofcarryinginventory(cashbeingtiedup)hastobebalancedagainstprofitopportunities
lostbynothavingproductsreadyforsale

compareAIHPtocompetitorsandthecompanysownhistoricaltrends

6)INVENTORY(BS)ANDACCOUNTSPAYABLE(BS)
howinventorydrivesacorrespondingliability

rawmaterialsarepurchasedoncredit
productioninputslikeenergyarealsoboughtoncredit

ACCOUNTSPAYABLEAREPAIDSOONERTHANINVENTORYISSOLD

averagepurchasecreditperiodforproductionrelatedpurchaseshowlongittakesthe
companytopayforgoodsthatwentintomakingtheproductsitwillsell

averagepurchasecreditperiodforproductionrelatedpurchases
____________________________________________________*inventory=acctspayable(inventory)
averageinventoryholdingperiod

freerideforthefirst4weeksofholdinginventorybuttheremaining9weekshavetobe
financedfromdebtandstockholdersequity

7)OPERATINGEXPENSES(IS)&ACCOUNTSPAYABLEOPERATINGEXPENSES(BS)
someoperatingexpenseshavetoberecordedbeforetheyarepaid

OPERATINGEXPENSESDONOTINCLUDEDEPRECIATION,INTERESTORINCOME
TAX

externally,only13operatingexpensesarereported.Advertisingisreportedtomanagers
butrarelytothepublic.

manyoperatingexpenseshavetoberecordedassoonastheliabilityisincurredandnot
whenitpaystheexpense

WHENISALIABILITYINCURRED?
whenacompanytakesonobligationtomakefuturepaymentandeconomicbenefithasbeen
received

[telephonebills,advertisements,legalfees]veryshortcreditperiods

recordingunpaidexpensesdoesnotdecreasecash.Cashoutflowtakesplacewhen
accountspayablearepaid.

8)OPERATINGEXPENSES(IS)&PREPAIDEXPENSES(BS)

someoperatingexpensesarerecordedbeforetheyarepaid
certaincostsarepaidbeforetheyshouldberecordedasanoperatingexpense

[insurancepremiums,officesuppliesboughtinbulk,annualpropertytaxespaidatthestartof
theyear]

everymonthanentryisrecordedtoremovetheappropriatefractionofthecostfromthe
prepaidexpenseaccountandtorecordthisportioninanoperatingexpenseaccount

abizshouldknowhowlargeprepaidexpensearerelativetoannualoperatingexpenses

GAAPrequiresoperatingcostspaidinadvancetobeputintheprepaidexpenseaccountand
notchargedtoexpenseimmediately

9)FIXEDASSETS,DEPRECIATION,ACCUMULATEDDEPRECIATION
shouldassetsberecordedatcurrentreplacementcostsorpurchasecosts

wewanttomatchexpensesw/salesrevenueorexpensesw/thecorrectperiod

anyexpensedirectlyconnectedwithmakingparticularsalesisrecordedinthesameperiod
asthesalesrevenue

salaries,rentingwarehousespace,accountingandlegalfeescannotbeassociatedwithany
particularsales.theyarerecordedintheperiodinwhichthebenefitoccurstothebusiness.

inventoryholdscostofgoodsmanufacturedorpurchaseduntilthosegoodsaresold.Then,
COGSexpenseisrecorded.

INFINANCIALACCOUNTING,DEPRECIATIONMEANSCOSTALLOCATION

ourparticularcompanyownsallnonmanufacturingfixedassets

detailedbreakdownoffixedassetsmaybedisclosedinafootnotetothefinancialstatements
orinaseparateschedule

pp&eisreportedatoriginalcostbought

federalincometaxcodeprovidesbreakdownsfordepreciationlivesofassets

businessesareallowedtodepreciateassetsfasterthantheseassetsactuallywearout.
Congressthinksitisgoodeconomicpolicy

businessesareallowedtodepreciateassetsfasterinthefirsthalfoftheirlivesthaninthe

secondhalf.Thisreducestaxableincomeintheearlyyearsofusingthefixedasset.

usefullifeestimatesaregenerallytooshortsodepreciationtendstoberecordedtooquickly

accumulateddepreciationaccumulatesperiodbyperiodtheamountschargedto
depreciationexpense

bookvalueoffixedassetsportionoforiginalcostoffixedassetsthathasnotyetbeen
depreciated.Abusinessmaydisposeofassetsinthefuture.Ifnot,thisisfutureamountof
depreciation.

BUYINGTHEEXACTSAMEASSETSTODAYWOULDPROBABLYBEMORE
EXPENSIVEFORTHEBUSINESSTHANWHENASSETSWEREBOUGHT

fixedassetsareheldforusenotforsale.Nopointinrecordingreplacementcosts.

managersshouldcertainlyinsurefixedassetsatreplacementcost

10)ACCRUINGOPERATINGEXPENSES(BS)&INTERESTEXPENSE(IS)&ACCRUED
INTERESTPAYABLE(BS)
unpaidexpensesarerecordedforthepropermeasuringofprofit

someexpensesarerecordedassoonasinvoicesarereceived.Thesearepaidweekslater.
someexpensesareexplicitlysoughtoutbythebusiness.

atyearend,totalcommissionsearnedinDechavenotyetbeenpaid.Recordedinaccrued
operatingexpense.Verydifferentfromaccountspayable.

accruedoperatingexpenses:salescommissions,accumulatedvacationandsickleave,
telephoneandelectricitycoststhathavebeenincurredbutnotyetbilled,propertytaxesthat
shouldbechargedtotheyear

accumulatedliabilitiesforunpaidexpensesmustberecordedorliabilitiesandexpenses
wouldbeunderstated

itsnotunusualtoseeaccruedoperatingexpenseslargerthanaccountspayablefor
operatingexpenses

AOE+AParenotinterestbearing.Theycanbegroupedtogetherbecausetheyare
spontaneousliabilities.

AOE+APhavehugeeffectsoncashflow.

notespayablearesegregatedfromnoninterestbearingliabilities(AOE+AP)

interestisafinancialandnotanoperatingexpense.itshouldberecordedforalldaysthatthe
moneyhasbeenborrowed.
thereisalaginpayinginterest.Eitherinonelumpsum(<=1year)orperiodically(>1year).

11)INCOMETAXEXPENSE(IS)&INCOMETAXPAYABLE(BS)
totalincometaxesfortheyearhavenotbeenpaidatyearend.Itstaysasaliabilityuntilitis
paid.

corporationshavetopayfederalandstateincometaxes

SCorps,LLCsandLLCsserveasconduits.Onlyfederalincometaxesneedtobepaid.

youneedtobeacutelyawareoftaxrates

IncomeTaxPayable=IncomeTaxExpenseforYear*PercentageofIncomeTaxYettoBe
Paid

ashorttechnicalnote

12)NETINCOME(IS)&RETAINEDEARNINGS(BS)+EPS
10Mtotalassets
3Mtotalliabilities(noninterestoperatingliabilities+interestbearingnotespayable)
2Minvestedbyowners

whereistheremaining5Mcomingfrom?
retainedearningsprofitearnedbutnotdistributed

twoseparateownersequityaccounts:retainedearnings(taxablewhenreturnedtoowners)+
capitalinvestedbyowners(obviouslynottaxablewhenreturnedtoowners)

retainedearningsisnotanassetanditiscertainlynotcash

goingoutofbusinesscashdividendretainedearnings

averagecostpersharecapitalstock/sharesoutstanding

13)CASHFLOWFROMPROFIT
Salesrevenueandexpensescausechangesinassetsandliabilities

1stsection:cashflowfromprofit

explainswhycashflow!=netincome

profitmustbeearnedandconvertedintocash

netincome>cashflowfromprofitrequiressevenadjustements

WHATARETHESEVENOPERATINGASSETSANDLIABILITIES

1.ACCOUNTSRECEIVABLE
anincreasedecreasescashflow

2.INVENTORY
anincreasedecreasescashflow

co.paidforallproductssoldduringtheyear(COGS)butitdidnotliquidategoodsininventory
whichitalsopaidfor

3.PREPAIDEXPENSES
x(notpaid)y(paid)=impactoncashflow(addifitspositive)

4.DEPRECIATION
writedownisrecordedasanincreaseintheaccumulateddepreciationaccountwhichis
subtractedfromPP&Eaccount
hastoalwaysbeaddedtodeterminecashflowfromprofit

partofthecashflowpaysthecompanyfortheuseofitsfixedassetsduringtheyear.sales
pricesincludedepreciationasacostofdoingbusiness.

5.ACCOUNTSPAYABLE
themoreaccountspayableacompanyhas,thelesscashflowsout
anincreaseinaccountspayableincreasescashbythatmuch

obligationsthatthecompanyhasatthestartoftheyeararepaidthroughouttheyear

6.ACCRUEDEXPENSES
themoretheaccruedexpenses(relativetostartandendofyear)thelesscashhasflowedout

7.INCOMETAXPAYABLE
initialtaxeswere36Kwhichwerepaidthroughouttheyear
attheendoftheyear,thecompanyhad24Kintaxeswhichwasnotpaid
thus,thecompanypaid12Kmorethannecessary.This12Kmustbeadded

OPERATINGASSETSHAVEAREVERSEEFFECTONCASHFLOW

OPERATINGLIABILITIESHAVEASAMEWAYEFFECTONCASHFLOW

cashflowisnotnetincome+depreciation

directmethodvsindirectmethod

14)CASHFLOWFROMINVESTINGANDFINANCING
theremainderofthecashflowexplainswhatthebusinessdidwiththe540Kofcashflow
[increasecash,payoffdebt,dividend]

atthestartoftheyear,theco.had750Kincash.Itwantedtoinvest750Kintocapexandit
did.However,thatwouldhaveleftitwithonly340Kwhichisnotthecase.Whathappened?

theco.borrowed175Kandissued50Kofcapitalstock

750K(cashflowsfrominvesting)
+225K(cashflowsfromfinancing)

economytanks,falloffinsales,ARnotcollectedontime,inventoryisnotsoldquicklyenough,
cannotpayemployeesalaries(risksofnothavingenoughcashonhand)

liquidityproblemsnothavingenoughcash
solvencyproblemsnotbeingabletopayliabilitiesontime

15)GROWTH,DECLINE,CASHFLOW
changesinoperatingassetsandoperatingliabilitiesaffectcashflowfromprofit

depreciation
profitisthemarginbywhichsalesrevenueexceedsexpenses
customerspaythebusinessrentonitsfixedassets

operatingassets
changesin(accountsreceivable,inventory,prepaidexpenses)affectcashflowfromprofit
increasesdampercashflow
decreasesmeanthebusinessliquidatespartofitsinvestmentintheseassetssocashflow
increases

operatingliabilities
increasesinaccountspayable,accruedexpenses,incometaxpayablehelpincreasecash
flowfromprofit

decreasingoperatingliabilitiesreducescashflowfromprofit

theamountofdepreciationrecapturemaynotbeenoughtoprovideallthecashneededfor
newfixedassetsastheirpricesincreaseovertime

cashflowinthesteadystate
depreciationisconstant
changesinoperatingassetsandoperatingliabilitiesdependmostlyonwhetherthebusiness
isgrowing,decliningorholdingsteady

salesrevenue:accountsreceivable
costofgoodssold:inventory

ZEROCHANGESHAPPENONLYIFTHECOMPANYKEEPSOPERATINGRATIOS
CONSTANTBETWEENTHEINCOMESTATEMENTANDTHECORRESPONDING
BALANCESHEETACCOUNTS

averagecreditperiodextendedtocustomers,averageinventoryholdingperiod,average
creditperiodofaccountspayable

growthpenaltyoncashflowfromprofit
growthisthecentralstrategyofmostbusinessesbecauseitleadstoanincreaseinprofitand
shareholderswealth.however,expensesmayoutstripsalesrevenue

HOWGROWTHWILLIMPACTCFFPNEXTYEAR

changesinoperatingassetsandliabilitiesassumethatthecompanysoperatingratiosremain
thesame

retainedearningsasnetincome

thisloweramountofcashflowisduetoverylargehitsoncashflowcausedbyincreasesin
accountsreceivableandinventorynextyearthatareneededtosupportthehigherlevelof
salesandexpenses

growthisgoodforprofitbutnotthatgoodforCFFP
cashflowishigherinthesteadystatebutprofitislower

improvingoperatingratiosisverydifficultinperiodsofgrowth

cashflowrewardfromdecline
cuttingexpensesisnotenoughtocombatafallinsales.mostcoalsohavefixedassets

COGSdecreasesproportionallytoadropinsalesrevenue

interestexpensedoesnotdecreasenextyearsoeveryoperatingassetandliabilityexcept
accruedinterestpayabledrops

threedecreasesinoperatingliabilitiesarenegativeadjustmentsbutchangesin
operatingassetsplusdepreciationmorethanoffsetsthedecreaseinoperating
liabilities

whathappenstocashflowwhenthereisanegativenetincome?

actualcashinflowduringtheyearfromsalesrevenueisdifferentfromtheamountofsales
revenue.actualcashoutflowduringtheyearforexpensesisdifferentfromthetotalamountof
expenses

creditorsmakeithardtoincreaseoperatingliabilitieswhenthebusinessisoperatingataloss.
managersofprofitlosingoperationscannotincurfurtherliabilities

16)FOOTNOTES:FINEPRINTINFIN.STATEMENTS
incomestatement
summaryofprofitmakingactivities(salesrevenue+expenses)
finalprofitnetincome

balancesheet
assets,liabilities,ownersequity
basictypesofassetsusedbyabusiness
differenceb/woperatingliabilities
investedcapitalvsretainedearnings

cashflowstatement
CFFP!=netincome
exposesfinancialstrategyofthebusiness

lackoffootnotescouldmakefinstatementsmisleadingbutdefinitelyincomplete

1.mainaccountingmethodsusedbybusinessareidentifiedandbrieflyexplained.selectionof
accountingmethodshavetobeclarifiedinfootnotes

depreciationmethodsaredisclosedinfootnotes

consolidationhappensonlyifthereiscontrollingstakeinsmallerbusiness

2.maturitydates,interestrates,collateral,securityprovisions,detailsofthelongtermdebt,
annualrentalsunderlongtermleases,detailsonstockoptionsandemployeestock
ownershipplans,potentialdilutioneffectsonEPS,majorlawsuitsandotherlegalactions,
retirementandpensionplans,medicalcostresponsibilitiesforretiredemployees

GRAYAREASOFFEROPPORTUNITY

stockholderscanaskquestionsattheirannualmeetingswithtopmanagersandtheboardof
directors

22)RATIOSFORCREDITORSANDINVESTORS
finstatementsaresupposedtorenderanaccountingtoaco.sourcesofcapital

finstatementsmaynotbefirstsourceofinformationaboutacompanysprofitperformance
pressreleaseswithshortsummariesoftheirmostrecentearningsresultstendtobe

WHATTODOWITHAFINSTATEMENTONCEYOUHAVEIT
wewillfocusonannualreportsnotquarterly

ratiostomeasuresituation,achievements,potentialtroublespots
ratiosletyouknowifprofitperformanceisgood,mediocreorpoor

trendanalysissalesgrowthordeclineanditsimpactonprofitperformance,cashflow,
financialcondition

1.seeifbusinessmadeaprofitorsufferedaloss
2.seeifthereareextraordinarygainsorlosses
3.areassetsadequatetothedemandsoftheliabilities
4.useCFstatementtofigureoutwheretheco.gotitsmoneyduringtheyearandwhatitdid
withthatmoney
(540Kcashflowfromprofit,750Kincapex,25Kfromothersourcesofcashinaggregate
leadingtoa184Kdeclineincash)
5.figureoutcashflowpershare

notethattherearenotratiosforanalyzingCFstatements.potentialmurkiness/opportunity

statementofchangesinstockholder'sequityiscertainlyneededwhenabusinesshasa
complexownershipstructurethatincludesdifferentclassesofstockandwhenabusiness
repurchasedsomeofitsowncapitalstocksharesduringtheyear

cashflows(noratios),solvency,profitperformance

solvencyabilityofabusinesstopayliabilitieswhentheycomedo

currentratio(shorttermsolvency)
totalcurrentassets/totalcurrentliabilities
2:1orhigherisbetter

acidtest(quickratio)[excludesinventoryandprepaidexpensesfromassets]
*inventoryisnotnearlyasliquidasaccountsreceivable*
onlycash,marketablesecurities,accountsreceivable/totalcurrentliabilities
1:1orbetter

debttoequity
totalliabilities(nointerest,interest,shortterm,longterm)/totalequity(investedcapital,
retainedearnings)

timesinterestearned
operatingearnings=earningsbeforeinterestandincometax(EBIT)
EBIT/interestexpense

returnonsalesratio
netincome/salesrevenue
howmuchofsalesiskeptasincome

returnonequity
annualnetincome/stockholdersequity
shouldbecomparedwithindustryaverageandwithinvestmentalternatives

preferredstockhasfirstclaimonnetincome
preferredstockrequiresfixedamountofdividendstobepaideachyear

returnonassets
operatingearnings/totalassetsatyearend
howmuchwasearnedbeforeinterestandincometaxfromeachdollardeployed

basicearningspershare
netincomeavailableforcommonstockholders/totalnumberofoutstandingcommonstock
shares
doesnotrecognizetheadditionalsharesthatwouldbeissuedwhenstockoptionsare
exercised.doesnotrecognizeconvertiblebonds,convertiblepreferedstock

Mostbusinesscorporationshaveenteredintocontractsofonesortoranotherthatrequire
thecompanysometimeinthefuturetoissueadditionalstocksharesatpricesbelowthe
marketvalueofitsstockshares,Atthepresenttimenoneoftheseshareshavebeenactually

issued.

p/eratio
currentmarketpriceofstockshares/basicEPS
tobecomparedwithindustrywideandmarketwideaverages

assetturnoverratio
annualsalesrevenue/totalassets

PREFERREDSTOCKDIVIDENDSARENOTREPORTEDASANEXPENSE.NETINCOME
ISBEFOREANYDIVIDENDSTOSTOCKHOLDERS.

17,18,19,20,21,23

24)AFEWPARTINGCOMMENTS
primarycapitalmarket(corpgets$)vssecondarycapitalmarket(sellergets$)

neverforgetthatatransactionhasasellerandabuyer.whywouldtheotherguysell?

[raids,LBO,corpacquisitions,privatepurchases]

payattentiontotheshortcomingsmentionedbytheCPA

ACCOUNTINGISANEVOLVINGLANGUAGE

CPAauditorshaveahardtimediscerninghighlevelmanagementfrauds/conspiracies

FORENSICACCOUNTINGISFUCKINGCRUCIAL

finstatementshelpyouknowwhatyouaregettinginto
haveearningsbeenconsistent,whatisthedebtstructure,whataretheprofitabilityratios


seehowthedeltainsalesrevenuecomparestonetincomeaswellasmajoroperatingassets
ofthebusiness
didaccountsreceivable,inventory,longtermoperatingassetsincreasebyanumber
similartothechangeinsales?disparitiesinthisarenotpointedoutbymanagement

differencesinprofitmeasurementmethodsarealmostalwaysnegligible.ifchoiceofmethods
yieldsahugedisparity,thisisREALLYquestionable

accountingmethodsmattermostwhenyoubuyaprivatebusiness

badnewsisusuallyminimizedforaslongaspossible
earningsareusuallysmoothedovertoappeartogrowataconsistentrate

financialreportsdonotexplicitlyrevealmoatsorprofitmakingstrategies
THEANALYSTHASTODISCERNTHESE

finstatementsdonothavemeaningfuldistinctionsbetweenfixedandvariablecosts
profitmarginsofkeyproductlinesarenotreported

valueofacodependsonprofitmakingabilitiesintothefuture

(marketablesecurities,accountsreceivable,FIFObasedinventory)current=book
(LIFObasedinventory,longtermoperatingassetsdepreciatedbyacceleration,oldland)
current!=book

buyersneedinternalandexternalfinstatements

roadmapstoprofitarenotinfinstatements
totalvalueofabusinessisnotinthebalancesheet