Analysis

The Latest from The Institute News

  • June 30, 2022
    Clay Tokens – UAFRS vs AR Monthly Highlights | June 30, 2022

    It is a great compliment to say something ages like fine wine.

    It means that something has gotten better over the years. Over time, fine wine develops a more nuanced and complex flavor that is often thought of as higher quality. Similarly, a person who has “aged like fine wine” has gotten better over the years, often by becoming more dashing in appearance or more well-rounded in personality...

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  • April 30, 2022
    Clay Tokens – UAFRS vs AR Monthly Highlights | April 30, 2022

    Three months ago, in Clay Tokens, we covered the concept of excess cash…

    Specifically, we discussed how not all cash is created equal. As Benjamin Graham identified in The Interpretation of Financial Statements in 1937: “there is a tendency to hold more cash than the business needs.”...

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  • March 31, 2022
    Clay Tokens – UAFRS vs AR Monthly Highlights | March 31, 2022

    What does it mean to be “special”?

    Many folks typically think of things that imply being “better than” or “greater than” when it comes to something being “special.” Think special events, special promotions, or special athletes…...

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  • February 28, 2022
    Clay Tokens – UAFRS vs AR Monthly Highlights | February 28, 2022

    The primary focus of investors can be summarized by one word: returns.

    Namely, investors would love to know how much of a return they will make on the capital they invested in a given investment. Of course, this is all but impossible in practice. Instead, investors often must settle for looking back at the returns they have made....

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  • January 31, 2022
    Clay Tokens – UAFRS vs AR Monthly Highlights | January 31, 2022

    Folks in finance often use the phrase “cash is king.”

    These three words are used to describe different financial concepts, from a belief that cash is more valuable than other investment tools to an emphasis on cash in analyzing businesses to the importance of cash flow for the overall health of a business....

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  • December 21, 2021
    Clay Tokens – UAFRS vs AR Monthly Highlights | December 21, 2021

    In our most recent issue, we highlighted how M&A accounting violates the matching principle and misrepresents economic reality by consistently underreporting the profitability of an acquired company. This causes multiperiod distortionsin the acquiring firm’s income statement...

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  • October 1, 2021
    Clay Tokens – UAFRS vs AR Monthly Highlights | September 30, 2021

    When I teach advanced accounting to up-and-coming future accountants, I have to tell the students to just memorize GAAP rules and do what the standards tell them to do...

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  • August 16, 2021
    Clay Tokens – UAFRS vs AR Monthly Highlights | July 31, 2021

    Professor Baruch Lev is one of the foremost academic experts when it comes to analyzing the impact of deficiencies in corporate financial reporting....

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  • July 15, 2021
    Clay Tokens – UAFRS vs AR Monthly Highlights | June 30, 2021

    This month, we turn to another all-time great value investor the co-founder of legendary hedge fund Baupost Group, Seth Klarman—for his take on financial reporting deficiencies in general and the focus of this month’s report… inflation or more accurately, currency devaluation....

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  • June 9, 2021
    Clay Tokens – UAFRS vs AR Monthly Highlights | May 31, 2021

    Last month, we highlighted Warren Buffett and his distaste for GAAP and IFRS accounting standards.

    When Warren Buffett talks, his comments are worth listening to. And if you were not already aware, Buffett has said a great deal about problematic accounting standards....

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  • May 6, 2021
    Clay Tokens – UAFRS vs AR Monthly Highlights | April 30, 2021

    I recently had a wonderful conversation with Ralph Nach. Ralph is a former co-author of the Wiley GAAP Guide. He teaches continuing professional education courses for practicing CPAs on many of the most difficult and complex accounting topics. Ralph was also one of the very first members of the UAFRS Advisory Council for Uniform Accounting....

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  • March 31, 2021
    Clay Tokens – UAFRS vs As-Reported Monthly Highlights | March 31, 2021

    Whitman built impressive investment results over decades. While he accomplished this feat, Whitman also found time to call out the problems with as-reported financial statements under GAAP....

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  • March 3, 2021
    Valens Research – UAFRS vs As-Reported Monthly Highlights | February 28, 2021

    No industry is free from the inconsistent rules of GAAP accounting that create extensive distortions from economic reality. In this issue, we highlight a chemicals company, a payroll servicer, and a diversified industrial conglomerate. Everything from net earnings to total assets is calculated in ways that seem almost arbitrary under Generally Accepted Accounting Principles....

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  • February 22, 2021
    Valens Research – UAFRS vs As-Reported Monthly Highlights | January 31, 2021

    Stock-based compensation (SBC) is an accounting headache. Just last year, PwC published a 250+ page report to help its clients navigate its intricacies....

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  • April 21, 2020
    The Difference Between a Great Company and a Great Stock

    In mid-1998, Coca-Cola’s (KO:USA) stock price traded at a high of about $88 per share. Almost eight years later, the firm’s stock price stood at half that mark: $44. Did the company lose their incredible competitive advantages?

    Around the same time, an incredible stock price run was taking shape. A major discount retailer watched as its stock price soared more than tenfold from 1996 to 2000. It wasn’t Wal-Mart, Best Buy, or some other popular store. It was AMES Department Store, which was bankrupt by 2002....

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  • April 21, 2020
    How to Calculate Uniform Return on Assets (ROA)

    Arcane Accounting Mathematics: Destroying Valuations and Shareholder Wealth

    Traditional financial analysis metrics tend to muddle our insight on the intrinsic value of a company. Rather than focusing on the ability of a company to create value, which is the primary goal of the intermediate to long-term investor, these metrics lead the investors to focus on activities that do not necessarily contribute to the creation of shareholder wealth....

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  • April 21, 2020
    When Cash is Not Cash and Why

    Investors, other analysts, and management often rely on cash flows reported in the financials as a foundation of performance analysis and valuation. Unfortunately, those cash flows are not what they appear to be.

    Many use the statement of cash flows (such as “cash flows from operations”) for judging earnings quality, measuring performance, and as key elements of discounted cash flow analysis. The cash flows reported from operations, however, are not truly from operations. Cash flows for financing do not accurately report the company’s financing activities. Cash flows reported for investing simply are not what the financials would purport....

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  • April 16, 2020
    Good versus Bad Free Cash Flows

    Home Depot (HD:USA) was a darling of the investing public from 1985 until 2001, with returns in excess of 20x the market over that period. In the era of the tech market and the internet boom, a home improvement retailer was one of the best performing stocks for a 16-year period....

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  • September 8, 2016
    R&D Is an Investment, Not an Expense – How capitalizing R&D impacts understanding corporate profitability

    The problem with Generally Accepted Accounting Principles (GAAP) is that they create inconsistencies when comparing one company to another, and can distort a company’s true historical profitability. By making adjustments, we aim to remove the financial statement distortions and miscategorizations of GAAP. In this article we will discuss why we capitalize R&D in order to see a clearer, more accurate picture of a company’s historical profitability....

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  • April 22, 2016
    The Dark Side of M&A

    • 70+ were in attendance at the New York Society of Securities Analysts panel, discussing the serious problems with mergers and acquisitions (M&A) reporting
    • It’s not just problems with goodwill. Under GAAP, Generally Accepted Accounting Principles, M&A accounting mixes apples and oranges throughout the financial statements, e.g. AT&T/Direct TV, Becton Dickinson/CareFusion, and Dollar Tree/Family Dollar
    • Parent company assets are held at book value while many acquired assets are restated significantly to “fair value.” This means the parent’s assets continue to depreciate from historical book values, while the acquired assets come on the books at “new,” usually lower, fair values...
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