What it is:
Accounting earnings are some of the most closely followed numbers a company publishes.
Care should be taken when comparing accounting earnings over time, as many companies and industries are cyclical and/or seasonal. As a result, comparisons are generally most meaningful between the same fiscal quarter in different years.
How it works (Example):
A simple formula for calculating accounting earnings is:
Let's assume that Company XYZ delivered the following financial results last year:
|Cost of Goods Sold||$500,000|
Using the formula and the information above, we can calculate Company XYZ's Accounting earnings are as follows:
$1,000,000 -$500,000-$300,000-$100,000-$5,000+$1,000-$10,000-$10,000= $76,000
In general, negative or low earnings might suggest a myriad of problems, ranging from inadequacies in customer or expense management to unfavorable accounting methods.
Changes in accounting methods can greatly influence accounting earnings, and in many cases these changes may have little to do with a company's actual operations. Some companies strive to minimize taxes and will therefore intentionally minimize their accounting earnings.