I'm a newbie to both accounting and stock valuations.
Currently I'm reading a book called Security Analysis by Benjamin Graham and the book is extremely old and its difficult to understand because accounting practices have changed since 1934.
To make a long story short the author states that at that time corporations could write down inventory and charge surplus account bypassing the earnings statement. By surplus account im assuming he means Retained Earnings. So the charge to surplus goes unnoticed and the future earnings statement will be inflated since inventory has been written down in the previous period increasing future net earnings by the amount written down. So essential a company would take money out of surplus and show it as income in a future period. From my understanding that's because inventory has been written off and future net earnings increase because the profit margin is higher.
Nowhere in the book does he mention Cost of Goods Sold. So I'm having a hard time visualizing all this without Cost of Goods Sold. The way I understand it is if inventory gets written down, the COGS increase, which decreases net income. But in the earlier days they could bypass the income statement and take it out of retained earnings?
And it appears that today companies try to increase inventory which reduces COGS and therefore increases net income?
So it seems that back in the day, decreasing inventory, increased the net earnings but today increasing inventory, increases net earnings?
Is this paradox because they had no COGS in the income statement?
I'm all confused here.
Currently I'm reading a book called Security Analysis by Benjamin Graham and the book is extremely old and its difficult to understand because accounting practices have changed since 1934.
To make a long story short the author states that at that time corporations could write down inventory and charge surplus account bypassing the earnings statement. By surplus account im assuming he means Retained Earnings. So the charge to surplus goes unnoticed and the future earnings statement will be inflated since inventory has been written down in the previous period increasing future net earnings by the amount written down. So essential a company would take money out of surplus and show it as income in a future period. From my understanding that's because inventory has been written off and future net earnings increase because the profit margin is higher.
Nowhere in the book does he mention Cost of Goods Sold. So I'm having a hard time visualizing all this without Cost of Goods Sold. The way I understand it is if inventory gets written down, the COGS increase, which decreases net income. But in the earlier days they could bypass the income statement and take it out of retained earnings?
And it appears that today companies try to increase inventory which reduces COGS and therefore increases net income?
So it seems that back in the day, decreasing inventory, increased the net earnings but today increasing inventory, increases net earnings?
Is this paradox because they had no COGS in the income statement?
I'm all confused here.