I know nothing about finance and buisness, but that whole sale of Big Brother thing sounds like it is, or should be, illegal?
Yeah, weird to say that kind of stuff publicly. Of course you're allowed to show your company in the best light possible when trying to sell, but trying to deceive the investors by manipulating the numbers to make the company seem more profitable and stable than it actually is, is definitely illegal.
DP and Ben - the sale is legal in this context. Company owners are expected and encouraged to show their firm's in the most positive light. Manipulating your earnings, while perhaps suspect, is not illegal if done under appropriate guidelines.
That is why auditors use a set of standards in determining if certain actions are appropriate to prevent owner malfeasance (as much as can be prevented).
For example, inventory management. Inventory is an asset, but it's not a liquid one, as in, it's not always easy to sell immediately for cash should the need arise. One expense that can reduce assets related to inventory are "Bad Debt Expense" meaning inventory you gave on credit is not being repaid. I loan 10 jeans to 10 shops at $1 each, but I know that one shop just isn't going to pay, I can't still fairly claim $100 on credit. I have to expense the $10 loss, so now I only have $90 on credit. Along with this, there is the "Allowance for Doubtful Accounts". This means that management doesn't know, but suspects, that some of the inventory on credit will not be repaid. This is a future estimate of the expense. So going forward, I say, "look I loaned $100, but realistically I may only get $95 back due to uncertainty".
The "Allowance for Doubtful Accounts" is of course an educated guess, but it reduces assets, and lower assets means lower owner's equity. If there was a long history of ADA being, say, 3% of credit sales, but in the most recent quarter it fell to 2.5%, then perhaps you could argue that there was cause to change the estimate being used to calculate the ADA. The effect of lowering ADA estimate will directly boost net income, as you reduced an expense. It will also raise Cash Flow.
A more pertinent example to the mag business is unearned revenue. When you pay Big Brother for a year's worth of ads, they are not allowed to book that revenue until they've delivered a full year of magazines with your ads. Why? Because revenue is only counted when the dollar amount is known AND delivery / exchange of good is made. After Jan, you still owe them 11 months worth of ads, so you can only book 1/12 of the yearly amount as revenue. This creates a liability -- unearned revenue, in the amount of the other 11 months.
This is pretty hard and fast rule, but you can pull forward the sales by, say, contracting with other vendors on either a commission basis for size and spacing or frequency of the ads, or some other reason that would allow you to potentially show the sales as earned revenue sooner.
The point is these are two of 100 hypothetical ways earnings can be managed. And since the company only sold for 600k (540k really) then something as small as a 50k reduction in expense could be the different between money pit and break even (that is speculation on my part, they don't break out the size of any other numbers).
The way I read it is that they did everything they could to try and cast the company in a more positive light, and auditors provided their assurance that it was acceptable (auditors bear no responsibility, but they do go in and double check the methods).
TLDR: It sounds "odd" but accounting is full and contingent upon educated guesses which at the end of the day opens to door to potential manipulation, but as long as you follow certain guidelines (ie, auditors approve, meets GAAP standards) then it is legal.
Topic: THE HISTORY OF WORLD INDUSTRIES AND ITS $29 MILLION DOLLAR SALE (Read 5237 times)