Core Earnings Adjustments

One final observation concerning audited financial statements: The reported outcomes are based on the GAAP system, which means that the conclusions are far from accurate. You need to take steps to adjust reported results to identify likely future trends.

The results you see on an audited statement include everything, even profits from nonrecurring events. So if a company sells a major operating unit or has capital gains, those profits are included in the "bottom line" even though they won't occur again next year. The GAAP system enables this to occur, so the reported earnings are distorted. It is the equivalent of a consumer going to the bank and requesting a loan, and including in "annual income" a $200,000 profit from selling a home a few months before. The banker would adjust the numbers and tell that person that the home sale cannot be included in "annual income." That is precisely what corporations do in their financial statements—and it is acceptable under the GAAP system.

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