Withheld pay is NOT an offset to earnings which would appear in the Income Statement. Withheld or otherwise unpaid debts such as pay, outstanding loans, unpaid dividends to stockholders, unsold inventory, etc appear on the Balance Sheet as a direct offset to the CURRENT NET VALUE of the company.
First, a brief tutorial in double-entry bookkeeping:
- Every entry in a company's books of account has a debit side and a credit side.
- Debits ALWAYS equal credits!
- That's why books balance.
- Debits increase assets, decrease liabilities, or are expenses.
- Credits increase liabilities, decrease assets, or are income.
In the instance we're discussing, the debit side of the entry records the currently paid 80% and
the deferred 20% as current
payroll expense, and the credit side decreases cash by the 80% and creates a current liability, accrued payroll, to account for the 20%; the deferred payment of the 20% doesn't negate its immediate recognition as an expense in the company's books of account.
"Current Net Value" may be an analysts term that I've never heard, but there's no such term in financial accounting.
The accrued payroll impacts the company's CURRENT POSITION...its all-important ratio of current assets to current liabilities (although in this instance the unspent cash has an equal and opposite effect).
Typically the first, and in surprisingly many (most?) cases ONLY, thing a banker considering a loan or an investor considering a stock purchase or sale looks at is the Balance Sheet. Personally I have never understood that since the Income Statement, Profit and Loss, and/or Cash Flow statements present a picture of performance over time while the Balance Sheet is a static snapshot of the company at a given point in time. But the Balance Sheet rules with all but the most sophisticated investors. As I said the market is not always rational.
You've just called an awful lot of experienced professional bankers and investors "unsophisticated" and "irrational", and I'll differ with you on it...very strongly.
In the contexts of lending and investing, historical earnings are nice to know, but they're water under the bridge...more or less useless other than for gaining perspective on current earnings, projected earnings are pie in the sky, and cash flow is only part of the picture.
While I'd NEVER lend money to or invest it in a company without looking at all of its financial statements, its balance sheet is what I'd look at first; in a nutshell, it tells both WHAT AND WHERE THE COMPANY IS and
HOW IT'S BEEN MANAGED, and it overrides all else in terms of being worthy of consideration.
I've run across any number of companies whose statements of profit & loss and cash flow would have you emptying your pockets, but whose balance sheets immediately revealed that they were teetering on the edge of insolvency, if not already over the it.
That "static snapshot of the company at a given point in time" is what bankers and investors are, as the case may be, banking on or investing in.
You have to read all the various financial statements to get a true picture of a company's performance and often not all of those statements are available to the public and what is available is not the set of books that is seen by the IRS or used to actually run the company. Remember there are at least three sets of books in large institutions.
I'll take issue with the way that's stated, if not its substance.
A company has only ONE set of books, and from it, its balance sheet and statements of profit & loss and cash flow, the financial statements used to run it on a day to day basis, are derived in more or less detail depending upon the use to which they're to be put.
The balance sheet is the same one that's given to IRS on a company's Form 1120, U.S. Corporation Income Tax Return; IRS doesn't get a statement of cash flow.
A company's profit & loss statements for book and IRS purposes may
differ, but there's no special set of books involved.
The differences, which result from differences between what constitutes income and expense according to Generally Accepted Accounting Principles and as seen by IRS, i.e. as stipulated in the Internal Revenue code, are reconciled in Schedule M-1 or M-3 (depending on the size of the company) of the company's Form 1120.
By way of example, the most common Schedule M-1/3 entry in my experience (and I"ll guess in that of all others too) is depreciation resulting from a quicker write-off of assets for tax purposes than for financial accounting purposes.
That different statement of profit and loss doesn't impact a company's day to day operations, nor is it particularly pertinent in any other business respect. Anything consequential in Schedule M is stated in detail, rather than as a free-standing number, in the notes to the company's financial statements.
The key to Amazon is in my statement that they did not make any profit from sale of goods until 2016 or 2017. They did make a substantial profit however, from other activities such selling information to advertisers and others about who purchases what, and the founders and investors became ridiculously wealthy from the increase in stock value.
Thanks for clarifying your ambiguous original quote.
There are no few companies that like Amazon, make little or no money from sales of product but get huge returns from inflating increasing the value of their stock.
In saying " get huge returns" you really meant "generate huge returns for investors".