Where EBITDA Falls Flat
The financial accounting world is tricky and can be manipulated if need be. Flashy accounting can hide assets, income, losses, and other things from the balance sheet and income statement. A balance sheet can have its limitations and often what is doesn’t reveal is what an investor should be worried about.
Because EBITDA considered sales revenues and not interest, taxes, depreciation or amortization, there can be problems with EBITDA.
Enter the crafty bookkeeper or controller that understands the world of journal entries and debits and credits. Accounts can be easily raised or lowered as long as there is an off-setting journal entry and change the characteristics of the summary balance sheet accounts significantly. Sales may not look so high if expenses are cut or retained earnings or stocks accounts are changed. One who is analyzing and EBITDA report may also miss contra accounts and those are accounts that should not be missed.
On the income statement side of things, another problem with EBITDA is increasing sales revenues but decreasing cost of sales (credit) and debiting some other account that won’t show up on the EBITDA financial report.
If you’re an investor, it pays to ask for and review (in detail) the general ledger that shows all the adjusting journal entries and if you see something funky, you can make an inquiry.
On the other side of the crafty bookkeeper or controller is the ineffective accounting person that fails to make proper journal entries that can also make an EBITDA report false.
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