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I Don't Understand Why Companies Can Hold Assets or Debts Off The Books

Discussion in 'Accounting, Tax & Legal' started by Chris C, 16th Jun, 2009.

  1. Chris C

    Chris C Well-Known Member

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    I was reading a comment on Market Watch today that got a huge amount of thumbs up, and it touched on something that I just don't understand.

    Why can companies manipulate their profitablity but individuals can't. Surely all off-the-book account should be made illegal, or is their an actual societal benefiting reason behind this type of structure?
     
  2. Rob G.

    Rob G. Well-Known Member

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    No no no ....

    You completely misunderstand the purpose of this accounting.

    I can assure you that their IRS does not use these sets of books.

    They are merely for duping shareholders into thinking there is value in the company via ludicrous Financial Reports.

    And don't forget all those corporate bonuses linked to share price.

    Cheers,

    Rob
     
  3. Chris C

    Chris C Well-Known Member

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    So are you saying that for the purposes of paying taxes a company must disclose everything, but to its shareholders its not obligated to give accurate reflection of their financial standing?

    I still don't understand why this is allowed. It seem ridiculous for it to be legal if there is no merit to improving its business function.
     
  4. Superman

    Superman Well-Known Member

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    Yeah - just simple old school dodgy accounting.

    When they spend money on something that is an expense, they treat it as an asset, so in the accounts of the company it looks like fewer expenses, so higher profit, and also more assets so the accounts look artificially sweet and makes the company look like it is worth more than it is.

    I think the article was just highlighting the shortcomings in the American financial system and everyone agreed.

    Make sense?
     
  5. Waimate01

    Waimate01 Well-Known Member

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    This is one reason why seeing a company is paying a fully franked dividend is a good thing.

    Some say that it makes no difference whether the company pays tax and you get a franking credit, or whether the company pays no tax, and gives you a commensurately higher dividend from which you pay the tax. Arithmetically it might amount to the same thing, but in practice if a company is paying a full whack of tax, then what they're telling you is a profit *really is* a profit.

    It's a rare thing for a company which is ********ting to its shareholders to pay a bunch of unncessary tax just to make their ******** seem more credible.
     
  6. Waimate01

    Waimate01 Well-Known Member

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    Oops - pardon my asterisks. The missing word was "bamboozling" ;)