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The Financial Times Guide to Investing, 3rd Edition by Glen Arnold

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13

Tricks of the accounting trade

Financial statements are supposed to show the underlying economic performance of a company. The profit and loss account shows the difference between total revenue and total expenses. The balance sheet displays the assets, liabilities and capital of the business at a snapshot moment. What could be simpler than adding a few numbers to get a trustworthy and definitive conclusion? Well, drawing up a set of accounts is far from simple, or unambiguously precise. It is nowhere near as scientific and objective as some people would have you believe. There is plenty of scope for judgement, guesswork or even cynical manipulation. Despite the mountain of accounting rules and regulations there are numerous opportunities ...

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