The degree of audit oversight is not an accounting standard. You stated that differing accounting standards allow more difference between cash flows and accrual net income, and I showed that there are not differing accounting standards for most of a cap-weighted index of funds. And the goal of accounting standards was never to keep cash flows close to accrual net income anyway.
If you were quoting verbatim, then sure, I said accounting standards, but to me, that means both the rules in place as well as the execution of those rules. Accounting is not a perfect way of depicting actual business results. I agree that accrual basis is better than cash basis, but going back to Monkey Uncle's original assertion that US firms won't grow as fast as International, my point is actual usable cash flow is a much better predictor of investor return than straight accounting net earnings because accounting earnings are subject to manipulation while cold hard cash is harder to fake.
Sorry, I guess my master's degree and work experience in accounting on multiple continents doesn't qualify me to post in such rarefied air.
No need for snark, it doesn't matter to our discussion what your credentials are. I said it's a more advanced topic because most of the posters here don't really make the net income vs cash flow available to owners distinction. Besides, I'm disagreeing with you, not attacking you as a person. Don't take it so personally
The shipbuilder's maintenance is an expense and the depreciation approximately corrects for the capital consumed during the period; for a steady-state firm the capital that must be used to buy facilities and the depreciation will be similar, so these effects are both already in net income. If the tech company has the same reported earnings as the shipbuilder, it must either have comparable expenses or much lower revenue than the shipbuilder. But that's not even really the point. This is the point: The fact that accrual earnings could differ from cash flows does not cause risk to the investor. The investor can find out the company's cash flows if he or she wants them.
I never argued for relying on only the income statement. My point is that an investor can sit down with the financial statements and peruse everything that's publicly available, from the four statements to the notes, and add to that analyst forecasts, conference calls, industry knowledge, and more. Accounting standards that allow a firm to recognize more income than you would like them to are not necessarily a problem given all this other information. There is no need for net income to be like cash flows - investors that care about cash flows already have a place where they can get them in the 10-K.
Depreciation of
existing assets are represented in current net earnings, but the shipbuilder, in order to grow and get new business, would have to spend some of its net earnings (or take on debt/issue equity, which the tech firm can do also) to build a new ship or a new factory (remember, we're discussing this in context of how the difference between accrual earnings and actual cash available affects growth). The tech company even with its lower revenues was able to extract more out of revenues, and can grow without as much capital expenditures. Theoretically this should be built into the P/E ratios of the market cap, but there's always inefficiencies when a majority of investors look at only earnings or only market cap. And yes, I agree with you that the investor can find out the company's cash flows if he or she looked at the financials, but we're talking about index investors, when you index, you don't look at the underlying economics of a company and you're relying on the rest of the public to feed you the right price. Are you willing to bet that the rest of the public is able to understand the true economics of a company? (i.e., do you believe in the efficient market?)
Many of Enron's frauds (improper capitalization and round-trips, for example) affected both operating cash flows and net income, and only $5 million of several billion of foreign currency translation losses for Philip Morris hit the income statement last year (see Form 10-K page 62), so both of your examples don't actually work.
You are correct, changes in fair value mark will show up in the operating cash flows. But again, if it was so easy for everyone to see, why did investors have blinders on when it came to MTM earnings but did not deduct that when it was obvious the earnings were coming from changes in fair value?
Another example if Enron isn't doing it for you - there are many companies that are notorious for overestimating discount rate in pension accounting. That affects the net earnings each year, sometimes by a large material amount. Does that reflect actual economic reality? Even though cash flows are not increasing, the company is suddenly more profitable. These are the limitations of accounting that can seriously hurt investors.
On Philip Morris, you're not understanding me - I'm not talking about foreign currency translation, that's below the net income line in comprehensive income, I'm talking about how much the dollar has moved against actual net income operating results. It's taken a full $.80 (when compared to dollar strength at the end of 2013) before net diluted earnings of $4.76 a share. That's 14% of earnings gone before you see the final net earnings number. See page 25 of the 10-K (you could argue that these are management numbers and thus are not fully audited in most cases, but then we're back to talking about application of accounting standards, what's to prevent management from saying, oh the currency will adjust, let's just use USD strength as of 12/31/13 so we can have $5.56 per share earnings?)
International market cap indexes are supermajority Europe, Japan, Canada, and Australia. Their accounting standards are solid.
That's true, 70% of international is those 4 areas, that leaves 30% exposure to the other economies - but those 4 countries/regions are also super mature/established, some would argue more so than the US, so Monkey Uncle's point about the US not being able to grow as much as international would then be based on faulty logic. That's why in context I assumed he was discussing emerging economies and China
