Reading Between the Lines of

Corporate Financial Reports: In Search

of Financial Misstatements Jacek Welc
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 READING
BETWEEN
THE LINES OF
CORPORATE
FINANCIAL
REPORTS

In Search of
Financial Misstatements

JACEK WELC
Reading Between the Lines of Corporate
Financial Reports
 Jacek Welc

Reading Between
the Lines of Corporate
Financial Reports
In Search of Financial Misstatements
Jacek Welc
SRH Berlin University of Applied Sciences
Berlin, Germany
Wroclaw University of Economics
Wrocław, Poland

ISBN 978-3-030-61040-1 ISBN 978-3-030-61041-8 (eBook)

https://doi.org/10.1007/978-3-030-61041-8

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland
AG 2020
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether
the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse
of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and
transmission or information storage and retrieval, electronic adaptation, computer software, or by similar
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The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication
does not imply, even in the absence of a specific statement, that such names are exempt from the relevant
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The publisher, the authors and the editors are safe to assume that the advice and information in this book
are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or
the editors give a warranty, expressed or implied, with respect to the material contained herein or for any
errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional
claims in published maps and institutional affiliations.

Cover illustration: Background image: santima.studio

This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
 Preface

“There are more things in heaven and earth,

than are dreamed of…” by financial statement users
—William Shakespeare (paraphrased)

Corporate financial reports are involved in so many business and investment

activities that it is impossible to overestimate their relevance for managerial
decision-making. They are used by both corporate insiders (e.g. managers
of corporations), for instance in budgeting and performance evaluation, as
well as by external parties (e.g. stock market investors, creditors, suppliers
or governmental agencies) which are interested in an assessment of a given
company’s achievements and financial position. In fact, financial statements
constitute a primary source of information used in an examination of
corporate past results, but also in making investigations of a given entity’s
long-term perspectives, simulations of its future economic performance and
quantification of its business risk exposures.
However, even though corporate financial reports constitute an invaluable
source of information about an economic performance of companies, they
are far from being perfect. Multiple weaknesses of financial statements stem
from objective flaws of contemporary accounting methods (which always
entail rough simplifications of an often very complex business reality), as
well as from lacking immunity of corporate financial reporting to deliberate
manipulations and fraudulent acts. Consequently, reading, interpreting and
analyzing accounting numbers (e.g. when picking stocks or making credit risk

v
vi Preface

evaluation) should never be done mechanically and financial reports should

not be trusted blindly. While reading the lines of primary financial state-
ments (income statement, balance sheet and cash flow statement) is usually
quite simple and often does not consume much time, it is a skill of reading
between the lines that enables an insightful assessment of a given company’s
past results and likely future performance.
This book is aimed at guiding its reader, in a step-by-step way, through
multiple nuances and “backshores” of corporate financial reporting. Its
first four chapters deal with objective flaws of accounting and analytical
methods (Chapters 1 and 2) as well as with selected techniques of delib-
erate accounting manipulations, including aggressive and fraudulent finan-
cial reporting (Chapters 3 and 4). Then, the following four chapters offer
a manual of analytical tools useful in assessing sustainability, reliability and
comparability of reported accounting numbers. The book closes with two
chapters that present selected techniques helpful in increasing comparability
and reliability of corporate financial statements.
The main body of the text of this manuscript is supplemented by an extra
supplementary material, in a form of the online appendix that includes almost
eighty additional tables and charts, which directly correspond to various real-
life case studies presented in the book. The contents of those tables and
charts are not absolutely essential for understanding the issues dealt with in
this publication. However, the author believes that reading the main body
of the text in combination with data and narratives included in the online
appendix significantly contributes to understanding the discussed topics and
enriches the educational value of this manuscript. All illustrations included
in the appendix are referenced in the book with the use of the acronym “A”
(for instance, “Table 1.1A”), so that the reader is not confused about where a
particular table or chart may be found (e.g. within the main body of the text
vs. in the online appendix).
The author’s mail goal was to offer a book that is strongly biased toward
practical applications of methods discussed in it, and which is understandable
for all those interested in analyzing financial statements, who do not have a
deep accounting background. Therefore, the author hopes that his book will
be “digestible” for a broad universe of non-accountants, who deal or intend to
deal with corporate financial reports. However, a reader’s basic knowledge of
the fundamental accounting concepts (including the content and substance of
three primary financial statements, i.e. income statement, balance sheet and
cash flow statement) will be needed in going smoothly through the content
of this manuscript. Also, understanding the most commonly applied finan-
cial statement analysis tools (such as profitability, liquidity and indebtedness
 Preface vii

ratios), although not absolutely essential, will be helpful in comprehending

the topics and problems discussed in this publication. Accordingly, those
readers who do not have any accounting background (and are not familiarized
with the three abovementioned primary financial statements), are suggested
to first learn the basics of accounting and corporate financial statements,
before reading this book. A good and clear coverage of the basic accounting
and financial statement analysis concepts may be found e.g. in the textbook
offered by Jill Collis (“Financial Accounting ”, Palgrave Macmillan, 2015).
The author’s business consulting practice has taught him that unskilled and
mechanical interpretation of data extracted from corporate financial reports
may be very hazardous and may result in very poor business and investment
decisions. Therefore, the content of this book is biased toward discussing
and illustrating the most typical problems and pitfalls associated with finan-
cial statement analysis. To the author’s knowledge, some of the issues dealt
with in this manuscript are overlooked by majority of other books on finan-
cial statement analysis (e.g. distortions caused by non-controlling interests or
manipulations of reported cash flows). This book also presents some analyt-
ical techniques which are not covered by most other available publications
(e.g. adjustments for long-term contracts, discussed in Chapter 10).
Huge majority of real-life case studies presented in this book are based
on accounting numbers (and narrative disclosures) extracted from corpo-
rate financial reports prepared in accordance to either International Financial
Reporting Standards (abbreviated to IFRS across the text) or US Generally
Accepted Accounting Principles (abbreviated to US GAAP). However, most
of the issues and analytical techniques, discussed in this publication, are appli-
cable to other accounting systems as well. Therefore, the author believes that
the content of this manuscript is universal, in a sense that it may be interesting
for all financial statement users around the world.

Jelenia Gora, Poland Jacek Welc

February 2020
 Contents

1 Most Common Distortions in a Financial Statement

Analysis Caused by Objective Weaknesses of Accounting
and Analytical Methods 1
1.1 Introduction 1
1.2 Undervaluation or Omission of Relevant Assets
on Balance Sheet 1
1.2.1 L’Oréal SA 2
1.2.2 AkzoNobel 4
1.2.3 Hudson’s Bay Company 5
1.3 Undervaluation or Omission of Relevant Liabilities
on Balance Sheet 6
1.3.1 Rental and Operating Lease Obligations 6
1.3.2 Contingent Liabilities of BP Plc 7
1.3.3 Contingent Liabilities of PG&E Corp 9
1.4 Inventory Write-Downs as an Imperfect Signal
of Problems with Excess or Obsolete Inventories 11
1.5 Distortions Caused by a Leeway in a Financial
Statement Presentation 14
1.5.1 Volkswagen and Daimler 15
1.5.2 Astaldi Group 19
1.6 Distortions of Turnover Ratios Caused by Seasonality,
Growth and Tax-Related Factors 20
1.6.1 Distortions Caused by Seasonality of Sales 21

ix
x Contents

1.6.2 Distortions Caused by Growth Rates of Sales 23

1.6.3 Distortions Caused by Changing Sales
Breakdown 25
Appendix 28
References 39

2 Other “Distortions” in a Financial Statement Analysis

Caused by Objective Weaknesses of Accounting
and Analytical Methods 41
2.1 Distortions Caused by Inventory Flow Methods 41
2.1.1 Incomparability of Results When Inventory
Prices Change 41
2.1.2 Distortions of FIFO-Based Profits When
Inventory Prices Change 43
2.1.3 Distortions of LIFO-Based Profits When
Inventory Turnover Changes 46
2.1.4 Conclusions 49
2.1.5 Distortions Caused by Noncontrolling
Interests 49
2.2 Distortions Caused by Changes in Accounting
Principles, Changes in Accounting Estimates
and Corrections of Accounting Errors 55
2.2.1 Incomparability of Results When
Accounting Principles Are Changed 55
2.2.2 Incomparability of Results When
Accounting Estimates Change 59
2.2.3 Incomparability of Results Caused
by Accounting Errors 62
2.3 Distortions Caused by Non-Mandatory Early
Adoption of New or Revised Accounting Standards 64
2.3.1 Boeing, General Dynamics, Lockheed
Martin and Raytheon 65
2.3.2 Kinaxis Inc. and Tieto Oyj 66
Appendix 68
References 75

3 Deliberate Accounting Manipulations: Introduction

and Revenue-Oriented Accounting Gimmicks 77
3.1 Quality of Earnings as One of the Major Problems
of Contemporary Accounting 77
 Contents xi

3.2 Links Between Earnings Manipulations and Balance

Sheet Distortions 80
3.3 Overstatement of Profits by Overstatement
of Revenues 84
3.3.1 Introduction 84
3.3.2 Overstatement of Profits by Premature
Recognition of Revenues Which Should Be
Deferred 84
3.3.3 Overstatement of Profits by Premature
Recognition of Revenues Which Are
Conditional on Future and Uncertain Events 86
3.3.4 Overstatement of Profits by Aggressive
Usage of Percentage-of-Completion Method
of Revenue Recognition 91
3.3.5 Overstatement of Profits by Artificial
Sale-and-Buy-Back Transactions 95
Appendix 99
References 100

4 Deliberate Accounting Manipulations: Expense-Oriented

Accounting Gimmicks and Intentional Profit
Understatements 103
4.1 Overstatement of Profits by Understatement
of Expenses 103
4.1.1 Overstatement of Profits by Understating
Write-Downs of Inventories and Receivables 103
4.1.2 Overstatement of Profits by Capitalizing
Excess Manufacturing Overheads
in Carrying Amount of Inventory 106
4.1.3 Overstatement of Profits by Aggressive
Capitalization of Costs in Carrying Amounts
of Operating Fixed Assets 109
4.1.4 Overstatement of Profits by Artificial
“Outsourcing” of R&D Projects 114
4.1.5 Overstatement of Profits by Delays
in Depreciating Fixed Assets 117
4.1.6 Overstatement of Profits by Understating
Provisions for Liabilities 119
4.2 Understatement of Profits by Overly Conservative
Accounting 122
xii Contents

4.2.1 Motivations for Profit Understatements 122

4.2.2 Four Approaches to Accounting 125
4.2.3 Real-Life Examples of (More or Less
Deliberate) Profit Understatements 129
Appendix 134
References 136

5 Evaluation of Financial Statement Reliability

and Comparability Based on Auditor’s Opinion,
Narrative Disclosures and Cash Flow Data 139
5.1 Introduction 139
5.2 Auditor’s Opinion 140
5.2.1 L’Oreal 141
5.2.2 Agrokor Group 142
5.2.3 LumX Group Limited 143
5.2.4 CenturyLink Inc. 143
5.2.5 Hanergy Thin Film Power Group Limited 145
5.2.6 Conclusions 147
5.3 Narrative Information Disclosed in Financial
Statements 148
5.3.1 OCZ Technology Group Inc. 148
5.3.2 Sino-Forest Corp. 152
5.3.3 AbbVie Inc. 153
5.3.4 Fresenius Group 157
5.3.5 Electronic Arts Inc. and Take-Two
Interactive Software Inc. 159
5.4 Discrepancies Between Operating Profits
and Operating Cash Flows 161
5.4.1 Toys “R” Us Inc. 162
5.4.2 21st Century Technology Plc 162
5.4.3 Pescanova Group 163
5.4.4 Carillion Plc 164
5.4.5 Cowell e Holdings Inc. 165
5.4.6 Conclusions 166
Appendix 167
References 167

6 Problems of Comparability and Reliability of Reported

Cash Flows 169
6.1 Introduction 169
 Contents xiii

6.2 Unreliability of Reported Cash Flows When Cash

Balances Themselves Are Falsified 169
6.2.1 China MediaExpress Holdings Inc. 170
6.2.2 Satyam Computer Services Limited 171
6.2.3 Patisserie Holdings Plc 172
6.2.4 Conclusions 173
6.3 Spurious Improvements in Operating Cash Flows
of Shrinking Businesses 173
6.3.1 Admiral Boats S.A. 174
6.3.2 Claire’s Stores Inc. 177
6.3.3 Cowell e Holdings Inc. 178
6.3.4 Conclusions 180
6.4 Distortions of Reported Cash Flows Caused
by Non-controlling Interests 180
6.4.1 Distorting Impact of Non-controlling
Interests on Reported Cash Flows 180
6.4.2 Real-Life Example of Rallye SA 183
6.5 Distortions of Reported Cash Flows Caused
by Capitalized Intangible Assets 189
6.6 Distortions of Reported Cash Flows Caused
by off-Balance Sheet Financing Schemes 192
6.7 Distortions of Reported Cash Flows Caused
by Customer Financing Schemes 196
6.8 Distortions of Reported Cash Flows Caused
by Business Combinations 198
6.8.1 Distorting Impact of Business Combinations
on Reported Cash Flows 198
6.8.2 Real-Life Example of Conviviality Plc 200
6.9 Example of Eroded Intercompany Comparability
of Reported Cash Flows 205
Appendix 210
References 215

7 Evaluation of Financial Statement Reliability

and Comparability Based on Quantitative Tools Other
Than Cash Flows: Primary Warning Signals 217
7.1 Introduction 217
7.2 Signal No 1: Discrepancies Between Revenue Growth
and Inventory Growth 218
7.2.1 Burberry Group Plc 219
xiv Contents

7.2.2 Pittards Plc 220

7.2.3 Toshiba Corp 221
7.2.4 Conclusions 222
7.3 Signal No 2: Discrepancies Between Revenue Growth
and Receivables Growth 223
7.3.1 Ingenta Plc 224
7.3.2 Aegan Marine Petroleum Network Inc 225
7.3.3 OCZ Technology Group Inc 226
7.3.4 Conclusions 227
7.4 Signal No 3: Discrepancies Between Growth
Rates of Revenues and Unbilled Receivables
from Long-Term Contracts 228
7.4.1 General Electric Co 229
7.4.2 Carillion Plc 232
7.4.3 Astaldi Group 234
7.4.4 Conclusions 235
7.5 Signal No 4: High or Fast Growing Share
of Intangibles in Total Assets 236
7.5.1 GateHouse Media Inc 237
7.5.2 OCZ Technology Group Inc 239
7.5.3 Starbreeze AB 244
7.5.4 Conclusions 246
7.6 Signal No 5: Systematically Falling Turnover
of Property, Plant and Equipment 247
7.6.1 Sino-Forest Corp 248
7.6.2 Icelandair Group 251
7.6.3 Jones Energy Inc 253
7.6.4 Conclusions 254
7.7 Signal No 6: Falling Ratio of Depreciation
and Amortization to Carrying Amount of Operating
Fixed Assets 254
7.7.1 Lufthansa Group 256
7.7.2 Netia S.A 257
7.7.3 Toshiba Corp 258
7.7.4 Conclusions 260
Appendix 260
References 264
 Contents xv

8 Evaluation of Financial Statement Reliability

and Comparability Based on Quantitative Tools Other
Than Cash Flows: Additional Warning Signals 267
8.1 Signal No 7: Changing Growth Rates of Deferred
Revenues 267
8.1.1 US Airways Group Inc. 268
8.1.2 GateHouse Media Inc. 269
8.1.3 Dart Group Plc 270
8.1.4 Conclusions 272
8.2 Signal No 8: Unusual Behavior of Provisions
for Future Costs and Liabilities 272
8.2.1 OCZ Technology Group Inc. 273
8.2.2 Nortel Networks Corp. 275
8.2.3 Takata Corp 277
8.2.4 Conclusions 278
8.3 Signal No 9: Discrepancies Between Accounting
Earnings and Taxable Income 279
8.3.1 GetBack S.A 279
8.3.2 General Electric Co. 282
8.3.3 Aventine Renewable Energy Holdings Inc. 284
8.4 Signal No 10: Related-Party Transactions 285
8.4.1 GetBack S.A. 285
8.4.2 Hanergy Thin Film Power Group Limited 287
8.4.3 Astaldi Group 289
8.5 Signal No 11: Suspected Behavior of Allowances
for Impairments of Inventories and Receivables 291
8.5.1 OCZ Technology Group Inc. 292
8.5.2 EServGlobal Ltd. 294
8.5.3 Delta Apparel Inc. 296
8.6 Signal No 12: Suddenly Changing Breakdown
of Inventories 298
8.6.1 Volkswagen Group 299
8.6.2 Nokia Corporation 300
8.6.3 Cowell e Holdings Inc. 301
8.7 Signal No 13: Other Significant and Unusual Trends 302
8.8 Importance of Investigating Combinations
of Warnings Signals 308
8.9 When Detecting Accounting Manipulations May Be
Difficult 310
xvi Contents

Appendix 312
References 318

9 Techniques of Increasing Comparability and Reliability

of Reported Accounting Numbers: Selected Simple Tools 321
9.1 Introduction 321
9.2 Adjustments for Differences in Inventory Accounting
Methods 322
9.3 Adjustments for off-Balance Sheet Liabilities 331
9.3.1 Introduction 331
9.3.2 Example of Southern Cross Healthcare 332
9.4 Adjustments for Capitalized Development Costs
and Other Intangible Assets 342
9.5 Adjustments for Differences in Depreciation Policies
Applied to Property, Plant and Equipment 352
Appendix 358
References 365

10 Techniques of Increasing Comparability and Reliability

of Reported Accounting Numbers: Some More Advanced
Tools 367
10.1 Introduction 367
10.2 Adjustments for Non-controlling Interests 367
10.3 Adjustments for Long-Term Contracts Accounted
for with the Use of the Percentage-of-Completion
Method 376
10.3.1 Complexities of Accounting for Long-Term
Contracts 376
10.3.2 Possible Profit Overstatements Caused
by Unprofitable Long-Term Contracts 377
10.3.3 Adjusting Reported Earnings for Contract
Assets and Liabilities 379
10.3.4 Real-Life Examples of Warnings Signals
Generated by “Invoiced Earnings” 383
10.4 Increasing Comparability and Reliability of Financial
Statement Numbers with the Use of Data on Current
and Deferred Income Taxes 389
10.4.1 Accounting (Book) Earnings vs. Taxable
Income 389
 Contents xvii

10.4.2 Increasing Financial Statement

Comparability and Reliability with the Use
of Income Tax Disclosures 396
Appendix 405
References 415

References 417

Index 425
 List of Charts

Chart 2.1 Hypothetical example of a group of companies (Source

Author) 49
Chart 3.1 Hypothetical non-manipulated income statement
and balance sheet (* including income taxes. Source
Author) 80
Chart 3.2 Hypothetical manipulated income statement and balance
sheet, after recognizing a fictitious sales transaction
amounting to 100 units (and boosting net earnings
by the same amount) (*including fictitious revenue of 100
units; **including fictitious [non-existent] receivable
accounts, amounting to 100 units. Source Author) 81
Chart 3.3 Hypothetical manipulated income statement and balance
sheet, after understating expenses by 100 units (due
to a nonrecognition of salaries payable to employees)
(* understated by non-recognition of payable salaries,
amounting to 100 units; **understated by an omission
of payroll-related liabilities, amounting to 100 units.
Source Author) 82

xix
xx List of Charts

Chart 3.4 Hypothetical manipulated financial statements,

after a simultaneous overstatement of revenues by 100
units (due to a recognition of fictitious sales transaction)
and an understatement of expenses by 50 units (due
to a nonrecognition of payroll costs) (*including fictitious
revenue of 100 units and a corresponding fictitious
[non-existent] receivable account, amounting to 100 units;
**understated by an omission of payroll-related expenses
and liabilities, amounting to 50 units. Source Author) 83
Chart 6.1 Hypothetical cascading ownership structure within a group
of companies (*The only assets held by Subsidiary
B are shares in Subsidiary C; **The only assets held
by Subsidiary C are shares in Subsidiary D. Source Author) 182
Chart 6.2 Equity relationships between Rallye SA and its selected
non-wholly owned subsidiaries (as at the end of fiscal year
2018) (Source Annual reports of Rallye SA and Casino
Group for fiscal year 2018) 184
Chart 9.1 Five inflation indexes (expressed as percent changes
in prices, year over year) for metal and metal
products, in the period between January 2009
and January 2017 (Abbreviations of price indexes used:
PPICMM—Producer Price Index by Commodity
Metals and Metal Products: Primary Nonferrous
Metals, WPU10—Producer Price Index by Commodity
for Metal and Metal Products, WPU101—Producer Price
Index by Commodity for Metals and Metal Products:
Iron and Steel, WPU101707—Producer Price Index
by Commodity for Metals and Metal Products: Cold
Rolled Steel Sheet and Strip, WPU10250105—Producer
Price Index by Commodity for Metals and Metal
Products: Aluminum Sheet and Strip. Source Authorial
computations based on data published by Federal Reserve
Bank of St. Louis) 358
Chart 10.1 Equity relationships between Asseco Poland S.A.,
Formula Systems (1985) Ltd. and Sapiens International
Corporation N.V. (as at the end of fiscal year 2016) (Source
Annual reports of Asseco Poland S.A., Formula Systems
(1985) Ltd. and Sapiens International Corporation N.V.
for fiscal year 2016) 369
Chart 10.2 Differences between Carillion’s “invoiced earnings” and its
reported profit before taxation (in GBP million), based
on data presented in Table 10.6 (Source Annual reports
of Carillion plc for fiscal years 2009–2016 and authorial
computations) 406
 List of Examples

Example 1.1 Problem with excess inventories (followed by a collapse

of profitability) which does not require the inventory
write-down 12
Example 2.1 Impact of different inventory accounting methods
on comparability of financial results in a period
of rising inventory prices 42
Example 2.2 Distortions caused by FIFO in a time-series analysis
of results of a single company in periods of changing
inventory prices 44
Example 2.3 Distortions caused by “inventory digging” (or “LIFO
liquidation”) in periods of changing inventory prices 47
Example 3.1 Overstatement of profits by premature recognition
of revenues which should be deferred 85
Example 3.2 Overstatement of profits by premature recognition
of revenues when their final amount is uncertain (i.e.
when it is contingent on unknown future events) 88
Example 3.3 Overstatement of profits by premature recognition
of revenues when a customer retains a right to return
the goods purchased from the vendor 90
Example 3.4 Overstatement of profits by aggressive usage
of percentage-of-completion method 93
Example 3.5 Overstatement of profits by artificial sale-and-buy-back
transactions of inventories 96
Example 4.1 Overstatement of profits by understating inventory
write-downs 104

xxi
xxii List of Examples

Example 4.2 Overstatement of profits by capitalizing (in inventory)

costs of unused capacity 108
Example 4.3 Overstatement of profits by aggressive capitalization
of routine maintenance costs in carrying amount
of fixed assets 110
Example 4.4 Overstatement of profits by artificial “outsourcing”
of R&D projects 115
Example 4.5 Overstatement of profits by artificial delays
in depreciating fixed assets 118
Example 4.6 Overstatement of profits by understatement
of a warranty provision 121
Example 4.7 Understatement of profits by overstating inventory
write-downs (alternation of Example 4.1) 128
Example 6.1 Distortions of reported cash flows caused
by non-controlling interests (NCI) 181
Example 6.2 Overstatement of operating cash flows caused
by aggressive capitalization of routine maintenance
costs in carrying amounts of fixed assets (extension
of Example 4.3 from Chapter 4) 190
Example 6.3 Overstatement of operating cash flows caused
by artificial “outsourcing” of R&D projects (extension
of Example 4.4 from Chapter 4) 191
Example 6.4 Overstatement of operating cash flows caused
by transfers of borrowed funds through unconsolidated
entities 193
Example 6.5 Overstatement of operating cash flows caused by loans
granted by a company to its customers 197
Example 6.6 Distortions of reported consolidated operating cash
flows caused by an acquisition of an inventory-intensive
subsidiary 199
Example 10.1 Application of the percentage-of-completion method 378
Example 10.2 An aggressive application of the percentage-
of-completion method for an unprofitable long-term
contract 380
Example 10.3 “Invoiced earnings” and their estimation with the use
of financial statement disclosures (based on data
presented in Example 10.2) 382
Example 10.4 Accounting for book-tax differences related
to depreciation 392
Example 10.5 Accounting for book-tax differences related to warranty
provisions 394
Example 10.6 Accounting for tax-loss carry-forwards 395
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 We could not take a maple sugar and mix it with cane sugar and
obtain the price for pure maple-sugar syrup unless it had the quality,
unless it cost so much. In other words, in speaking of maple syrup—
and here is the part of this I forgot to speak of—if you take maple
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without the addition of any reducing sugar or white syrup—not
glucose, but pure cane or beet sugar—if you have to sell it without
doing that, it would be so expensive as to be prohibitory, because
with Canadian maple sugar worth twelve cents a pound today, it
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price of nearly a dollar a gallon for your liquor as a first cost, without
the cost of package. * * *
The above quotations will illustrate sufficiently well the processes
of manufacturers and dealers in adulterating maple syrup. It is
evident from this testimony that if the pure article be obtained when
purchased at random it is by accident rather than by intention.
Whatever may be the condition of the products when they leave the
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It is evident from the above résumé of the subject that the
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the amount sold in this country is the genuine article. It is evident
that the makers of the genuine article are forced into competition
with these extensive adulterations, thus lowering the legitimate price.
Every grove of maple trees in the United States would be worth a
great deal more to its owner if the state and national laws should be
so framed as to eradicate this great evil. Such laws would permit the
sale of these mixed goods under their proper names, and thus
protect both the manufacturer and consumer.

Necessity for Sugar Makers’ Organizations.

 With a steadily growing demand for maple syrup, which today is
almost entirely supplied by the mixer, the producers of pure syrup
can hope to control the trade only through organization. The
difference between the pure and the adulterated product is so
marked that there would be little question as to choice, with the
genuine sugar known to the popular trade. A large number of the
consumers hardly know pure maple syrup when they taste it, and as
so great a part of that on the market is spurious, they have little
chance to learn. Under such a condition the market can be gained
for the pure product only by means of united action. An example of
such action is the present Vermont Sugar Growers’ Association.
The situation is very similar to that which has already been
successfully met, in the case of certain other farm products, by
organized cooperation of producers. Sometimes, as in Germany and
Canada, this has been initiated and substantially aided by
government action; sometimes, as in Ireland and England, it has
been carried through entirely by private enterprise. Some years ago
Canadian dairy products formed but an insignificant proportion of the
exports of these articles to Great Britain. Now, through the efforts of
the Canadian government to foster intelligent and honest methods of
production, an English market has been secured for the Canadian
output. The Irish Agricultural Organization Society has gone far
toward bringing about an economic regeneration of the island, and in
Germany rural prosperity has been vastly increased by the same
methods. In all these cases the principal purposes aimed at have
been the improvement of methods of production, and furnishing a
guaranty of purity to consumers.
In the case of maple sugar producers the first necessity is a
market for high grade, unadulterated sugar and syrup. This they
should be able to secure without much difficulty through responsible
association, which can guarantee the quality of all the product
bearing its name or stamp. * * *

The Amount of Sugar in Maple Sap.

 Maple sap is a nearly colorless liquid composed of water, sugar
and various mineral substances, such as lime, potash, magnesia,
and iron; it also contains some organic matter in the form of
vegetable acids. The peculiar flavor of maple sugar comes, not from
the sugar, but from some one or a combination of all the other
substances contained in the sap.
The amount of sugar in the sap of the average sugar maple tree
varies greatly, the percentage changing in each tree as the season
progresses. Careful experiments have shown that the sap contains
on an average about 3 percent of sugar. The maximum is reported at
10.2 percent, which was found in a small flow of sap from a sugar
maple near the end of a season, during which the tree averaged
5.01 percent.

The Manufacture of Sugar and Syrup.

The Sap Season.

The sap season throughout the maple sugar belt of the United
States generally begins about the middle of March and continues
until the third week in April but it varies very widely with a late or an
early spring. Sugar making has begun as early as February 22 and
as late as the first week in April. The season lasts on an average
about four weeks. The longest run on record included forty-three
days, and the shortest eight days.
 LARGE MAPLE SUGAR CAMP IN CENTRAL VERMONT.

THE VERMONT MAPLE SUGAR MAKERS’

ASSOCIATION.
Was organized at Morrisville, Vermont, January, 1893. The object
of this association is to improve the quality and increase the quantity
of the maple product of the state, and to protect the manufacturer
and consumer from the many fraudulent preparations that are placed
upon the markets of this country as pure maple sugar and syrup, and
to inform the general public where the genuine article can be
procured. The members of this association consist of the best
manufacturers of maple sugar and syrup in the state, and their
names and post-office address may be found in this work, and any
dealer or consumer ordering sugar or syrup from them will be sure to
get that which is pure and free from adulteration.
The association owns and issues a protected label to its members
upon their agreement, filed with the secretary, that they will only use
it upon packages containing pure maple sugar or syrup, of standard
quality, of their own manufacture, a copy of which label will be found
in this work, and a purchaser of a package covered by this label may
be assured of its purity. The improper or unauthorized use of this
label or any adulteration of the products covered by the same will be
prosecuted to the full extent of the law by the association.

QUALITY OF MAPLE SUGAR.

While it is true that the sugar product of the state has improved
greatly within the past few years, it is also true that there is
considerable of the product at the present time that does not show
the improvements that have been noted. It is one of the rules of the
Vermont Maple Sugar Makers’ Association that no member shall use
the label of the association on goods of an inferior quality, and a
member who does so use it is liable to be expelled from its
membership; therefore, it is well to insist upon packages bearing this
label, and customers are requested to report to the secretary of the
society any case of receiving poor goods bearing this label. While it
is the first object of the association to improve the quality of maple
products, and increase the quantity now produced, which can easily
be doubled, it recognizes as of the utmost importance that it should
place before the consumers the knowledge which shall enable them
to secure pure goods instead of an imitation product.
The fact that there is more of the spurious than of the genuine sold
at the present time shows that there is chance for abundant work in
that direction, and the officers of the association will always be glad
to aid customers in placing their orders when requested so to do, as
far as practicable, a medium of information between producer and
customer in which it is hoped that each will receive an advantage.
Maple goods as put up in Vermont, are in three general classes. 1.
The syrup or maple honey is put up and sealed in air-tight tin cans or
in glass, the usual form being the gallon tin can either round or
oblong and the syrup in these cans should weigh eleven pounds net
to the gallon or about eleven and three-fourths pounds including can.
Pure syrup varies to quite an extent in color. The first run of sap
usually produces syrup of a lighter color than is produced later in the
season. The color also depends upon the method used in collecting
the sap and boiling it and, other things being equal, the less time that
is allowed between the production of the sap and its conversion into
syrup or sugar the whiter will be the product. Were it possible to
convert sap to sugar without any lapse of time or exposure to the air
the product would be perfectly white. There has been a suspicion
among people who are familiar with Vermont maple products of the
last generation that the present goods were not pure because so
much whiter than formerly, but the change is due entirely to the
improved and more rapid methods of manufacture.

WELL LOCATED MAPLE SUGAR CAMP IN SOUTHEASTERN

VERMONT.

PURE MAPLE SUGAR.

 There is practically no adulteration of maple sugar in Vermont. The
state has a stringent law on the subject and the maple sugar makers
of the state will tolerate no infringement of its provisions, so that the
customer can feel great security in ordering sugar or syrup of
producers or dealers in the state, and can feel absolute security in
ordering these goods of any of the members of the Vermont Maple
Sugar Makers’ Association, bearing the label of the association. The
name and post-office address of all the members of the association
will be found in this booklet.

DIRECTIONS FOR THE CARE OF MAPLE SUGAR

AND SYRUP.
Sugar. To keep maple sugar in a warm climate, store in as cool
and dry a place as possible. If in tin and tightly covered it will mould
and ferment on top. To prevent this the best method is to take off the
covers and paste over the top of the can a piece of strong manila
paper. This will also serve to keep out the ants. Tubs with covers are
not as liable to ferment, but is it well to treat them in the same
manner.
Syrup. Syrup should be put in air-tight packages and kept so until
used. If the syrup is received packed in sawdust the best method is
to leave it in the original package and store in a dark cool place, until
needed for use, and if it is put up in glass be very careful to keep it
from the light. If for any reason the syrup should begin to ferment,
which will be known in the case of tin packages by a bulging of the
head of the can called “swelled-head” it should be borne in mind that
it is not necessarily spoiled as would be the case with fruit, but by
heating it to a boiling temperature the fermentation can be arrested
and the original flavor, to a great extent, restored. And in this
connection it may be said that either syrup or sugar, which has been
kept for some time, will be greatly improved in flavor by the same
treatment.
NEAR THE CLOSE OF THE MAPLE SUGAR SEASON.
 IN SUGARING TIME.
Helen M. Winslow, in Harper’s Bazaar.

It’s sugarin’-time up country; an’ settin’ here in town

I seem to hear the “drip, drip, drip” of sap a-tricklin down
Into them wooden buckets in our old sugar place,
Afore Josiah died, an’ our only daughter, Grace,
Insisted ’twasn’t noways safe for me to live alone
Up in that old brown farm-house that long’s I live I own;
An’ naught would do but I must come an’ stay along o’her,
Where sugarin’ might be hayin’ time, an’ all this bustlin’ stir;
Where smells o’spring, an’ tricklin’ sap, and wild flowers never
come.
There ain’t no chance for such things around Grace’s city
home;
An’ sugarin’-time no different ain’t from summer or from fall.
I wisht Josiah’n me was back—a-workin’ hard an’ all.

The children on these brick paved-walks they make me think

of Jim,
What we had hoped would stay by us—the farm was meant
for him.
He died when he was twenty. Yes, there was young Josiah,
Professor in a college now, with hope of something higher.
An Grace, our girl, she married what they called a railroad
king,
An lives on Beacon Street, in all the styles that she can swing.
But all the same, when April comes, I see ’em all again,
Jest runnin’ wild around that farm, them three, an in
All sorts of mischief daily, from early spring to fall.
I wisht the hull of us was back—a-workin’ hard an’ all.
I seem to see the tossels shakin’ out up on the trees;
I seem to smell the perfume of the May-flowers in the breeze;
I seem to feel the summer a-coming ’crost the hills;
I seem, up in the pastur’, to hear the singin’ rills;
I see the mowin’ lot, an’ hear the sharpen’ of the blades;
I hear the cattle lowin’; I go berryin’ in the glades;
I smell the harvest ripenin’ over in the corner lot;
I see Josiah bringin’ home that last new pair he bought;
I remember how together, when the children went away—
Grown big an’ married—by the fire we sat at close of day;
An’ how together we had lived there fifty year—come fall.
I wisht Josiah’n’ me was back—a-workin’ hard an’ all.

It’s sugarin’-time up country; but never once again

Shall I, now goin’ on eighty, see the spring a-comin’ in
The old way, thro’ the maple trees, ’crost the pastur’s brown;
For I must stay—in sugarin’-time—on Beacon Street in town.
The children never, as of old, shall I tuck in at night,
Their little feet so tired, but their happy hearts so light.
They wouldn’t go back if they could, an’ I’m too old they say;
An’ sence Josiah isn’t there, I let ’em have their way.

It’s sugarin’-time up country, though, an’ memories, like the

sap,
Start up an’ set me longin’ for Mother Natur’s lap,—
An’ him, an’ Jim,—the farm, the hens, the horses in the stall.
It’s sugarin’-time up country; I’m homesick—that is all.
 PURE FOOD AND DRUG LAW.
Vermont has a Pure Food and Drug law which strictly prohibits the
adulteration and misbranding of food products including maple sugar
and syrup. (Public Statutes of Vermont, sections 5466 to 5494
inclusive.)
Purchasers of maple products made in Vermont may rest assured
that they are as represented, and made from the sap of the maple
tree and nothing else. The maple sugar and syrup produced in
Vermont is not only pure but it has a delicacy of flavor and aroma not
found in the same product made in other localities. This fine flavor is
the result of the soil and climatic conditions to be found in the State.
 MAXIMS FOR MAPLE SUGAR
MAKERS.
Be in readiness to get the first run.
Have all utensils thoroughly cleansed and scalded.
Employ none but competent and experienced men to tap your
trees.
Cut away the rough bark, only, before tapping, leaving bark
sufficiently thick to hold the spout firmly to prevent leaking.
The finest flavor and lightest color will be obtained by shallow
tapping.
Gather often, boil at once. Every delay in the process of
evaporating sap will injure more or less the quality of the sugar.
Always strain your sap. Use felt strainers for syrup. Boil down to
11 pounds per gallon; test by a correct thermometer, and can hot to
prevent crystalizing in bottom of the can.
Give full gallon measure and ship only standard goods to your
best trade.
Use a reliable thermometer. It is as indispensable in the sugar
house as in the dairy.
Use tin or painted buckets and the best improved metallic spout.
The bucket cover has come to stay. Use them, they will save their
cost in one season.
Join your State Maple Sugar Makers’ Association, and attend the
convention.
Do not think that you know it all, for maple sugar making is a
science about which you may learn something every season if you
are observing.
 LARGE MAPLE SUGAR CAMP IN NORTHERN VERMONT.

RECIPES FOR USING MAPLE

SWEETS IN COOKING; HOME CANDY
MAKING, ETC.

Maple Rolls.
One quart of bread dough when it is moulded for the last raising,
mould in a cup of maple sugar, ¼ teaspoonful of soda, 1 tablespoon
of butter. Let it rise and mould again and cut out, rise and bake.
These are very nice.

Quick Tea Rolls.

One egg, ½ cup maple sugar, 3 teaspoons of baking powder in
flour enough to make a rather stiff batter, ⅓ cup of butter, 1 cup milk.
Bake in hot gem pans in a hot oven.

Maple Breakfast Rolls.

One egg, ½ cup each of milk and cream, 2 teaspoons baking
powder, 3 teaspoons granulated maple sugar, add flour till about as
thick as griddle cakes.

Fritters.
Three eggs, 1 tablespoonful sweet cream, ½ teaspoonful salt, 2
cups of sweet milk, 2 teaspoonfuls baking powder, about 4 cups of
flour. Mix the baking powder thoroughly with the flour, add the flour to
the milk, add the salt, then the eggs well beaten. Fry in hot lard.
Serve hot, with warm maple sap syrup.

Baked Apples.
Pare and core some good tart apples, put them in a shallow
earthen dish; fill the center where the core has been taken out with
granulated maple sugar, add water to cover bottom of dish. Bake in a
moderate oven until soft, basting often with the syrup.

Maple Apple Pie.

For one pie: ¾ cup of lard, 3 or 4 good sour apples which have
been pared and sliced; 1½ cups flour, ½ teaspoonful salt, 1 cup
maple sugar. Mix the lard, flour and salt thoroughly, add just enough
cold water to work it lightly together; the less you handle pie crust the
better it is—just enough to get it into shape to roll. Roll and put on
plate, spread the apple and add the sugar. Bake in a moderate oven.

Apple Pudding.
One layer of wheat bread sliced thin, 1 layer of sliced apples, put
on another layer of bread and apples and so on alternately until the
dish is full; flavor with lemon, pour over all two teaspoons water;
cover and bake one-half hour. To be eaten with maple syrup.

Berry Pudding.
1 pint flour, 1 teaspoonful cream of tartar, ½ teaspoon of soda,
milk enough to make a little thinner than biscuit, add 1 pint of berries;
boil 1 hour.
The sauce (served hot): 1 cup of maple sugar, ⅔ of cup of hot
water, 1 tablespoonful of flour, butter size of an egg.
Let come to a boil, then pour it over a well beaten egg, stirring the
egg. Flavor.

Maple Sugar Cake.

One-half cup of butter, ½ cup of milk, ½ teaspoon soda, whites of
5 eggs, 1 cup of maple sugar, 2 cups of flour, 1 teaspoon cream of
tartar. Beat the butter to a cream, then gradually add the sugar and
stir until light and creamy, then add the milk, then the whites of eggs
which have been beaten to stiff froth, last the flour in which the soda
and cream of tartar have been thoroughly mixed. Bake in three
layers in a quick oven. To be frosted with maple sugar frosting.

Nut Cake.
 One cup maple sugar, 2 cups of flour, 1 cup of chopped raisins, 3
teaspoonfuls of baking powder, ½ cup of sweet milk, 2 eggs, 1 cup of
chopped English walnuts.
Beat the butter to a cream, add the sugar gradually, and when light
add the eggs well beaten, then the milk, and last the flour in which
the baking powder has been thoroughly mixed. Mix this quickly and
add the nuts and raisins. Bake in rather deep sheets in a moderate
oven about 35 minutes.

Marble Cake.
Yolks of 4 eggs, ½ cup of butter, 1 teaspoonful of soda, 1½ cups
flour, ½ cup of maple molasses, ½ cup sour cream, spices of all
kinds.
For the light part: Whites of 4 eggs beaten to a froth, ½ cup of
butter, ½ teaspoon of cream tartar, ½ cup of flour, 1 cup of white
sugar, 2 tablespoons of sweet milk, in which dissolve ½ teaspoon of
soda.

Apple Cake.
One cup thinly sliced sweet apples cooked until transparent (in
one cup maple sugar, and water to make a good syrup); when cool,
add 1 cup dry maple sugar, 2 eggs, 1 heaping teaspoonful mixed
spices, ½ cup of butter, ½ cup cream, 1 teaspoonful soda, flour till
the spoon will stand in the middle without falling.

Shrove Tuesday Cake.

One quart of milk, 3 cups of flour, ½ teaspoonful of salt, 2 eggs, 3
teaspoonfuls of baking powder.
Mix the baking powder thoroughly with the flour, add the flour to
the milk, add the salt then the eggs, well beaten. Fry on a hot griddle
in large cakes. Butter and spread with maple sugar in layers until you
have a plate four or five inches high. Cut in pie shape and serve hot.

Maple Sugar Cream Cake.

One cup of maple sugar, 1 egg, ½ teaspoonful of salt, 1 cup sour
cream, 1½ cup of flour, 1 teaspoonful soda.
Add the soda to the cream; when it foams add the egg well
beaten; next, the sugar and salt, last the flour. Bake in a quick oven.

Maple Fruit Cake.

One cup sugar, 1 cup each of butter and sour milk, 1 cup of
chopped raisins, nutmeg and cinnamon, 1 egg, 1 teaspoonful soda,
2 cups flour, 2 cups butter, 4 eggs, 2 cups maple sugar, 1 cup maple
syrup, 1 cup sweet milk, 1 teaspoon soda, 1 teaspoon all kinds of
spices, 1 pound raisins, 1 pound currants, ½ pound citron, nearly 6
cups of flour.

Maple Sugar Frosting.

One-half cup maple sugar, ½ cup granulated sugar, ½ cup of
water. Boil until it will hair from a spoon. Stir briskly into the beaten
white of an egg. Beat until cool enough to spread.

Ginger Snaps.
1. Two cups maple sugar, 1 cup sour cream, 1 teaspoonful soda,
flour enough to make a stiff paste, 1 cup butter, 2 eggs, 2
tablespoonfuls ginger.
Roll thin and bake quick.
2. One cup maple molasses, 1 teaspoonful each of soda and
ginger, ⅔ cup butter, mix hard and roll thin.
 Maple Sugar Cookies.
Two cups of maple syrup, 1 cup of sweet milk, flour enough to roll
—about 5 cups, 1 cup of butter, 2 teaspoonfuls of baking powder. 4
eggs.
Beat the sugar and butter to a cream, add the eggs well beaten,
add the milk, next the flour in which the baking powder has been well
mixed. Roll and cut in any form to suit the taste. Bake in a moderate
oven.

Maple Sugar Ginger Bread.

One cup of maple syrup, 2 cups of flour, ½ teaspoonful salt, 1
teaspoonful soda, 1 cup of sour cream, 1 egg, 1 teaspoonful ginger.
Add the soda to the cream; when it foams add the egg well
beaten, then the maple syrup, salt and ginger; last add the flour.
Bake in a quick oven.

Maple Syrup Made From Sugar.

One pound maple sugar, 1 pint of water, boil ten minutes, skim
and cool.

Maple Sugar Ice Cream.

One quart cream, 2 cups maple sugar, 2 eggs, 1 pint of milk, ½
cup of flour, scant.
Let the milk come to a boil. Beat one cup of sugar, flour and eggs
until the mixture is light and creamy, then stir into the boiling milk;
cook until the flour is thoroughly cooked. Set away to cool. When
cold whip the cream, add the other cup of sugar and turn into the
cooked mixture and freeze.