Big bath

Big Bath accounting is the process where publicly traded corporations write-off or write-down certain assets from their balance sheets in a single year. The write-off removes or reduces the asset from the financial books and results in lower net income for that year. The objective is to ‘take one big bath’ in a single year so future years will show increased net income. This technique is often employed in a year when sales are down from other external factors and the company would report a loss in any event. For example, inventory valued on the books at $100 per item is written down to $50 per item resulting in a net loss of $50 per item in the current year. Note there is no cash impact to this write-down. When that same inventory is sold in later years for $75 per item, the company reports an income of $25 per item in the future period. This process takes an inventory loss and turns it into a ‘profit’. Corporations will often wait until a bad year to employ this ‘big bath’ technique to ‘clean up’ the balance sheet. Although the process is discouraged by auditors, it is still used. In recent times, General Motors and other US Corporations have taken huge write downs on balance sheet assets resulting in massive losses. The same result can be achieved by recording in one year the future cash costs of expected plant closing or employee layoffs. The objective is to take these loses all at once, so future periods can show positive net ncome.

External links

* [http://www.tradingmarkets.com/.site/news/Stock%20News/1802631/ GM Writeoffs]

* [http://ap.google.com/article/ALeqM5jcoo_edkfrOmKJ07kHTX1C0teJtAD9247DLG0 Ford Writeoffs ]

* [http://www.investopedia.com/terms/b/bigbath.asp Investopedia.com]