Intuition & Experience in Management Science

Anyone selling a product or providing a service uses basic arithmetic to determine how much money they take in and how much money they pay out. When the expenses are less than the revenues, they make a profit. This simple accounting principle becomes more complex as the items associated with the various components increases in complexity. Revenues can be based on cash received, or they may be placed on accounts receivable. Expenses and cost of goods sold similar can be paid for directly, or registered as accounts payable. Inventory valuation comes into play, and methods of determining invent

chments, managers can take advantage of the reluctance of some readers to delve into the additional supporting material that may be cumbersome and difficult. The summary information is accurate, but there may be specific information in the notes that render a vastly different opinion from the one that the summary information puts forth. Information contained in annual reports and 10-K filings fall into this category. While companies are truthful in their presentations, some using elaborate charts and graphs to illustrate the numbers, important information can be contained in the details. For example, when Timberland stated its debt in its 1994 annual report, it included a note referring to long-term leases that affected the debt position of the company. However, the lease obligation was not included in the summary information. For companies which are financially healthy and which are not carrying a high load of debt, the capitalization of leases is not usually material to the overall standing of the firm. In Timberland's case, including the leases made a difference in the company's standing and one which was noticeable only to those analysts willing to take on the complicated issue of calculating the present values and filt