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distortions caused by the balance sheet, such as overvalued assets. Overvalued assets are considered a timing issue here because, in most (but not all) cases, "the bill eventually comes due." For example, in the case of overvalued assets, a company might keep depreciation expense low by carrying a long-term asset at an inflated net book value (where net book value equals gross asset minus accumulated depreciation), but eventually the company will be required to "impair" or write-down the asset, which creates an earnings charge. In this case, the company has managed to keep early period expenses low by effectively pushing them into future periods.
It is important to be alert to earnings that are temporarily too high or even too low due to timing issues.
Classification Choices
Once the income statement is adjusted or corrected for timing differences, the other major issue is classification. In other words, which profit number do we care about? The question is further complicated because GAAP does not currently dictate a specific format for the income statement. As of May 2004, FASB has already spent over two years on a project that will impact the presentation of the income statement, and they are not expected to issue a public discussion document until the second quarter of 2005.
We will use Sprint's latest income statement to answer the question concerning the issue of classification.
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