Buffet challenges typical accounting rules.

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Article Summary


Key points:

  • Warren Buffet questions accounting conventions in Berkshire Hathaway’s annual letter to shareholders.
  • Buffet and Munger have developed their own formula to analyze earnings, showing different figures from audited numbers.

Article Summary:

Warren Buffet’s recent letter to Berkshire Hathaway shareholders questions traditional accounting conventions. He emphasizes the importance of looking beyond net earnings and introduces their own formula for analyzing earnings, which excludes unrealized capital gains and losses. Buffet criticizes regulators and auditors for endorsing “worse-than-useless” net income figures. The duo focuses on operating earnings, excluding certain elements like amortization and depreciation. Buffet’s scrutiny extends to accounting standards mandating amortization of Intangible Assets, prompting the possibility of other entities developing their own financial analysis frameworks. This article underscores the importance of understanding and questioning accounting practices to gain a clearer picture of a company’s financial health.

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