What are some of the big accounting inconsistencies you find in targets?

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April 22, 2020

by a searcher from Coastal Carolina University in Los Angeles, CA, USA

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Reply by a searcher
from Harvard University in San Francisco, CA 94128, USA
1. understanding pass through items, i.e. if you book $100 revenue but the expense is $100, while the EBITDA is the same, the business, one can argue is overstated. Also important if revenue multiples come into play. 2. sellers will pitch that the EBITDA profile is better because there are "add backs" / "one time charges". Digging into these are important. E,g. seller who also works full time for the business takes a salary of $250K, which is above market. They'll say, once I leave, that $250K cost won't exist. However, since the seller works full time, their job needs to be replaced by someone else. So you may want to hire a GM $150K per year, the add back in this case is lower than the seller's proposal of add back of $250K.
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Reply by a professional
from Philadelphia University in Toms River, NJ, USA
1. Inventory valuation issues are probably the most common, whether that be overstated (ex. for transaction purposes) or historically understated (ex. for taxable income purposes). Sometimes these are for financial purposes and other times just from a lack of sophistication or tracking. 2. Lately has been revenue recognition with the changes brought on by ASC###-###-#### General accrual accounting. Typically there may not be a significant impact to EBITDA for items like payroll or prepaid rent. However, one item that can cause major swings in EBITDA is accruals for vendor rebates. More often than not, these are recorded on a cash basis even if the company's books are primarily recorded using the accrual method.
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