Disadvantages of accounting profit

Last updated: 02.03.2016

Profit as a basic profitability indicator used by companies has the following drawbacks:

  • profit does not equal net inflow of money, costs  do not equal expenditures and incomes do not equal receipts
  • profit includes the results of operations that are ad-hoc and will not be repeated in the future
  • various methodologies particularly in the area of:
    • depreciation and amortization
    • impairment
    • provisions
    • accruals
    • valuation
  • different rates of taxation in various countries
  • different accounting standards (IFRS, US GAAP etc.) can treat issues very differently
  • profit is easy to manipulate (so called "window dressing") - e.g. by using different methodologies and their changes, delays in issuing documents

 

These facts make profit less comparable mainly between different entities, but also during comparisons in a time series.

Therefore, it is advisable to see the profit in the context of other indicators such as gross margin, total sales, cash flow, financial analysis ratios etc.



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