Murky Water Rui lucky short report interpretation (2) - advertising costs!
Murky water report evidence four: false increase150%Advertising costs (2019Q3) may cycle through inflated advertising costs to inflate revenue and profits
(Smoking Gun Evidence #4: …. Luckin overstated its 2019 3Q advertising expenses by over 150%, especially its spending on Focus Media. It’s possible that Luckin recycled its overstated advertising expense back to inflate revenue and store-level profit. )
Under the accounting standards of enterprises, sales expenses are inversely related to net profit. In terms of attracting investors, it is usually the better the net profit (the smaller the net loss, the better). So why would Mr. Rui want to inflate sales costs by inflating advertising costs?
Before discussing why Mr. Rui inflated advertising costs, let's talk about how advertising costs are calculated in the Murk water report. In practice, advertising expenses are one of the accounts that are easy to manipulate. Moreover, under corporate accounting standards, advertising costs do not have to be listed separately in the profit statement, making it easier to be cleverly hidden in fraudulent financial reports.
Accounting Standards for Enterprises30number-Article 31 of the Financial Statements provides that the items to be listed separately are:（(1) Operating income; (2) operating costs; (3) sales tax and surcharges; (4) administrative expenses; (5) sales expenses; (6) financial expenses; (7) investment income; (8) profit and loss on changes in fair value; (9) Loss on impairment of assets; (10) profit and loss on disposal of non-current assets; (11) income tax expense; (12) net profit; (13) net income after deducting the effect of income tax on other comprehensive income items, and (14) total comprehensive income.”
Advertising costs are not items that must be listed separately, but sub-items under sub-items under item (v) "Sales expenses". But the murky water report is still based on the information in the financial report of the Swiss lucky2019Advertising expenses for the third quarter of the year. How to do this: "Additional expenses for new customers in the quarter" are listed in the swiss financial report(Other new customer acquisition costs) "Quarterly advertising expenses" and "Quarterly other sales and marketing expenses" are also shown "Additional expenses per new customer/per new customer obtained quarterly"(aitem), "Number of new customers available quarterly" (bitem)and "Other quarterly sales and marketing expenses" (citem)。 Pass.aMultiply the item bybItem minuscitem, calculate Rui Lucky2019"Quarterly advertising expenses for the third quarter of the year."”。
Murky Water Report No31The page points out that, by calculation, Rui Yu is in2019Increased advertising costs in the third quarter of the year336million yuan, with inflated net income397Ten thousand yuan is basically flat.
After reviewing how the Murk water report calculates the quarterly advertising costs, let's talk about why Rui lucky to inflate the advertising costs? The author speculates that the main reason is still Rui Yu2019There was too much revenue in the third and fourth quarters of the year! The company's profit statement for the past three years, released after the listing, shows that the company has since2017The quarterly profit statement has been in the form of a large net loss. Because Ray is lucky to be there2019A substantial increase in revenue in the third and fourth quarters of the year, if not through inflated advertising costs to inflate sales costs, will result in a sharp rise in the profit curve, which is more likely to cause investors to suspect that their income false.
In addition, although sales costs have increased by inflating advertising costs, sales costs are still "relatively reduced" compared to the false increase in net income, which is a good thing2020Years.1Month.7dayF-1Table No89The statement on the page is confirmed, No89The page states "Although the company."2019Operating expenses (operating expenses as a higher account of operating expenses) increased in the first three quarters, but operating expenses as a percentage of net income decreased from2018Same period in the same period353.%dropped to161.7%”。
(1) For accounts that are prone to manipulation in practice, such as advertising expenses, efforts should be made to calculate them through other information in the financial statements, even if they are not shown separately.
(2) Although the inflated expenses will result in a decrease in the net profit listed in the financial report, which appears to be detrimental to the financial reporting preparer, the financial report-preparers still have the motivation to inflate the expenses, such as: excessive inflated income, the need for inflated expenses to match, to cover up the false increase in revenue.
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