Financial Shenanigans, Fourth Edition: How to Detect Accounting Gimmicks & Fraud in Financial Reports, 4th Edition

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Acquisition Accounting Shenanigan No. 1: Artificially Boosting Revenue and Earnings

Acquisition Accounting Creates Distortions on the Financial Statements

One reason investors have difficulty in interpreting financial statements of acquisitive companies is because certain costs that typically should be reflected as expenses on the Income Statement are instead found on the Balance Sheet in goodwill or intangibles. Moreover, some cash outflows typically reflected as reductions in cash flow from operations are classified as investing outflows on the Statement of Cash Flows.

Thus, the first two manifestations of distortion (shifting operating costs to the Balance Sheet and shifting cash outflows from the Operations section to the Investing section) ...