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 30-Year Bond   103 15/32    -2/32  5.88% Yield 
 

HEROES

Host Marriott Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMT)") else Response.Write("(NYSE: HMT)") end if %> rose $1 7/16 to $21 1/4 after announcing it would reorganize as a real estate investment trust (REIT) and spin off its senior living communities unit to investors. Additionally, the operator of Marriott and Ritz-Carlton hotels said it would spend $1.775 billion for 13 luxury hotels in the U.S. currently owned by the Blackstone Group. The transactions will result in fiscal 1999 funds from operations (FFO = earnings + real estate depreciation - gain on sale of real estate) of about $2.41 per share compared to the Street estimate of $2.15 per share, the firm said. The switch to REIT status places the firm on the same playing field as other high-end hotel operators, such as Starwood Hotels & Resorts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HOT)") else Response.Write("(NYSE: HOT)") end if %> and Patriot American Hospitality <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAH)") else Response.Write("(NYSE: PAH)") end if %>. However, Host Marriott will never have the more lucrative but grandfathered advantage of the so-called "paired-share" REIT status enjoyed by Starwood and Patriot American.

Broadcom Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BRCM)") else Response.Write("(Nasdaq: BRCM)") end if %> roared ahead $29 9/16 to $53 9/16, or a staggering 123%, after the Irvine, California-based company sold 3.5 million shares in an initial public offering this morning at a price of $24 per share. The company designs semiconductors that facilitate broadband digital data transmission, such as transmission via cable lines as well as through copper wire by means of digital subscriber line (xDSL) technology. The company's revenues grew 73% last year to $37 million, thanks in part to Broadcom's top five customers, which accounted for 62% of revenues. It's customers include General Instrument <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIC)") else Response.Write("(NYSE: GIC)") end if %>, 3Com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>, Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>, Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> and Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %>. The company currently trades at 62 times trailing sales-to-market capitalization, which places it at the upper end of the valuation range on this metric vis a vis its competitors -- Rockwell International, LSI Logic, VLSI Technology, and Royal Philips Electronics. However, the company's growth should track the build-out of the broadband products it serves, which should be explosive.

QUICK TAKES: American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %> rose $4 5/8 to $107 after the financial services company was reported in Business Week to be worth $140 per share in the event of an acquisition... 3D graphics accelerator chipmaker 3Dfx Interactive <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDFX)") else Response.Write("(Nasdaq: TDFX)") end if %> climbed $3 7/16 to $32 1/8 after reporting fiscal Q1 EPS of $0.50 versus a $0.13 loss a year ago, walloping the First Call mean estimate of $0.24... Online discount broker Ameritrade Holding Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTD)") else Response.Write("(Nasdaq: AMTD)") end if %> jumped $4 7/8 to $29 9/16 after reporting a fiscal Q2 loss of $0.02 per share, which was not quite as bad as the First Call mean estimate of a $0.07 per share loss... Stock Investor Trading News helped pump up shares of recorded music seller K-tel International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> $7 9/16 to $28 11/16 after it rated the company a long- and short-term "buy."

Nonstandard auto insurer Progressive Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PGR)") else Response.Write("(NYSE: PGR)") end if %> gained $11 7/8 to $138 9/16 after reporting Q1 EPS of $1.35 versus estimates for $1.19... Telecommunications firm TresCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRES)") else Response.Write("(Nasdaq: TRES)") end if %> rose $1 3/8 to $11 5/8 after Primus Telecommunication's all stock offer to buy the company was raised to $12 a share... Bank of Los Angeles <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BKLA)") else Response.Write("(Nasdaq: BKLA)") end if %> rose $2 1/8 to $18 5/8 after agreeing to be acquired by Newport Beach, California-based Western Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WEBC)") else Response.Write("(Nasdaq: WEBC)") end if %>. Under the deal, each Bank of Los Angeles share will be converted into 0.4224 of a share of Western Bancorp stock... It's Friday again, which means stocks are acting funny due to Business Week's infamous "Inside Wall Street" column. Oil services firm Baker-Hughes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BHI)") else Response.Write("(NYSE: BHI)") end if %> added $1 3/4 to $42 5/16 on speculation that it could be acquired by rival Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %>. Buyout speculation also helped corrugated paper container maker Gaylord Container Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GCR)") else Response.Write("(AMEX: GCR)") end if %> gain $7/16 to $8 5/16.

Computerized retail check-out systems and automated teller machine manufacturer NCR Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NCR)") else Response.Write("(NYSE: NCR)") end if %> advanced $1 1/16 to $33 after announcing a plan to buy back as much as $200 million of its outstanding shares. Also, the company launched a $306 million cash tender offer for the 30% stake of its NCR Japan subsidiary that it does not already own... Mutual fund manager T. Rowe Price Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TROW)") else Response.Write("(Nasdaq: TROW)") end if %> was lifted $1 7/8 to $75 3/8 after reporting fiscal Q1 EPS of $0.64 versus $0.45 a year ago, beating the Street estimate by a penny. Additionally, the company's shareholders today approved plans for a previously announced two-for-one stock split... Powerwave Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PWAV)") else Response.Write("(Nasdaq: PWAV)") end if %>, which supplies RF power amplifiers for wireless communications networks, gained another $5/8 to $19 11/16 after reporting higher-than-expected Q1 EPS of $0.13.

Ratings Movers:

Evans & Sutherland Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESCC)") else Response.Write("(Nasdaq: ESCC)") end if %> tacked on $1 7/8 to $28 5/8 after Wheat First Union upgraded the developer of 3D graphics hardware and software products to "buy" from "outperform"... Emisphere Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EMIS)") else Response.Write("(Nasdaq: EMIS)") end if %> added $7/8 to $18 3/8 after Piper Jaffray started coverage of the drug delivery company with a "strong buy" rating and a 12-month price target of $25 per share... Satellite-based network operator and cable equipment developer Scientific Atlanta <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFA)") else Response.Write("(NYSE: SFA)") end if %> climbed $1 7/8 to $20 1/16 after being upgraded to "buy" from "hold" at UBS Securities... Harmonic Lightwaves <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HLIT)") else Response.Write("(Nasdaq: HLIT)") end if %> advanced $1 5/8 to $17 5/8 after UBS Securities raised its rating on the fiber optic transmission systems company to "buy" from "hold"... Cybershop International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYSP)") else Response.Write("(Nasdaq: CYSP)") end if %> moved $11/16 higher to $11 11/16 after CE Unterberg Towbin started coverage of the online consumer products retailer with a "buy" rating.

GOATS

Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> sank $15/16 to $23 1/16 in heavy trading after the data networking products manufacturer late yesterday reported Q3 earnings of $0.04 per share (before charges), compared with $0.10 (excluding restructuring charges) in the year-earlier period and the analysts' mean estimate of $0.12. Including a $154 million charge for in-process R&D costs related to two acquisitions, Bay reported a Q3 loss of $0.66 per share. Revenues came in at $547, which was 15% below its Q2 figures and 50% less than the company had previously forecast. In addition, gross margins dropped to 46.8% versus the previous guidance of 49.5%. Bay was cut to "market perform" at Donaldson, Lufkin & Jenrette, "hold" at Deutsche Morgan Grenfell, and "market perform" at Goldman Sachs. Although 55% of Bay's revenues in the quarter came from "new" products (12 months old), roughly 29% of its sales are still derived from its LAN switch line that is subject to constant price drops. This, combined with customer indecision with respect to gigabit ethernet versus ATM backbones, routers versus routing switches, and 56K modem technology (an industry standard was just recently issued), will continue to make for some choppy quarters.

Analog integrated circuits maker Sipex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIPX)") else Response.Write("(Nasdaq: SIPX)") end if %> plunged $6 7/16, trading on more than 16 times its 30-day average volume, to finish the day at $22 7/16 after reporting first quarter earnings of $0.26 per share, which beat last year's Q1 EPS of $0.10 and the analysts' mean estimate of $0.16. So with that kind of EPS growth (160%), plus a 47% increase in sales and gross margin rising to 50.5% from 45.8% a year ago, why is the stock down 22%? Because far from gloating about its numbers, the company instead waved a yellow flag to investors, cautioning that economic problems in Asia continue to impact worldwide demand. Sipex is particularly concerned about Japan, which has provided the highest demand growth for the company's electroluminescent devices. The company also warned about "growing pricing pressure" (read: steep price cuts leading to lower margins) in the single protocol interface circuit market. Because Sipex's strong sales growth has depended on increases in booking rates and more orders received and shipped in the same quarter, the company isn't crowing too loudly now for fear that it may not have much to crow about come second quarter.

QUICK CUTS: General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> skidded for $1 3/16 to $68 15/16 after the country's biggest automaker reported a 5% drop in profits during the first quarter to $1.604 billion from $1.689 billion in the prior-year period. Per share earnings were $2.27 versus adjusted Q1 1997 EPS of $2.21 and the First Call mean estimate of $2.25... Ford Motor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> slipped $7/8 to $48 13/16 as Furman Selz lowered its rating on the No. 2 U.S. automaker to "buy" from "strong buy" based on stock price appreciation... MCI Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %> was down $1 1/8 to $51 11/16 after selling $1.2 billion of bonds consisting of $500 million in 12-year bonds sold at 6.549% yield and 14-year bonds that must be redeemed after four years and may then be resold as 10-year notes at 6.201% yield. Meanwhile, Moody's downgraded the company's senior rating to "Baa2" from "A2," its subordinated rating to "(P)Baa3" from "(P)A3", its short-term rating to "Prime-2" from "Prime-1," and the preferred stock rating of MCI Capital I to "baa3" from "a2."

GenRad Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GEN)") else Response.Write("(NYSE: GEN)") end if %>, which provides integrated test, measurement, and diagnostic solutions for electronic products, plunged $11 1/4 to $20 3/4 after reporting lower Q1 earnings and a 7% drop in revenues compared with the year-ago quarter. Q1 EPS excluding a deferred tax benefit were $0.05 compared with $0.23 last year... Software and system integration company Davox Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DAVX)") else Response.Write("(Nasdaq: DAVX)") end if %> plummeted $6 1/8 to $23 after CIBC Oppenheimer lowered its rating on the company to "buy" from "strong buy." First Albany also downgraded the stock to "buy" from "strong buy" due to concerns over product sales in next few quarters... UCAR International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UCR)") else Response.Write("(NYSE: UCR)") end if %> dipped $1/4 to $33 3/4 on reports that the graphite and carbon electrodes maker might have to seek bankruptcy protection in light of a series of lawsuits and antitrust fines. However, the company issued a statement saying it "has not filed for protection under any bankruptcy law and has not initiated any action in that regard."

ACE*COMM Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACEC)") else Response.Write("(Nasdaq: ACEC)") end if %>, which develops operations support systems products for telecommunications networks using intranets and the Internet, tumbled $1 3/16 to $6 after announcing late yesterday that it expects to report a Q3 loss between $0.55 and $0.58 per basic share with revenues in the range of $4.2 million to $4.6 million... Focused ion beam equipment and electron microscope manufacturer FEI Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FEIC)") else Response.Write("(Nasdaq: FEIC)") end if %> sank $1 7/8 to $9 3/8 after announcing that its Q1 earnings would be below market expectations. The company said sales for the quarter would most likely be about $6-$8 million lower than expectations with EPS in the range of $0.02 to $0.04, compared with the First Call mean estimate of $0.10.

Insurance underwriter Guarantee Life Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GUAR)") else Response.Write("(Nasdaq: GUAR)") end if %> dropped $4 5/8 to $28 after announcing that Q1 earnings will be "significantly lower" than the analysts' mean estimate. The company expects EPS of $0.02 to $0.05, down from last year's $0.32 and far short of the $0.46 predicted by analysts... Dominick's Supermarkets <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DFF)") else Response.Write("(NYSE: DFF)") end if %>, which operates supermarkets in the greater Chicago area, slid $5 7/8 to $40 after announcing it anticipates Q2 EBITDA (operating income before depreciation, amortization and non-cash LIFO charge) to be "substantially unchanged" from $35.8 million for Q2 1997, roughly $3 million below analysts' consensus estimate. Q2 EPS is expected to decline "slightly" from the year-ago quarter.

Security and investigation services firm Pinkerton's Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PKT)") else Response.Write("(NYSE: PKT)") end if %> lost $2 1/8 to $21 3/4 after announcing it expects Q1 earnings to be about $0.04 per share lower than the year-earlier quarter... Tabletop products designer Mikasa Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MKS)") else Response.Write("(NYSE: MKS)") end if %> dropped $1 to $12 13/16 after announcing it expects a Q1 loss $0.14 per share, compared with $0.02 for the prior-year period... BetzDearborn Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTL)") else Response.Write("(NYSE: BTL)") end if %> shed $2 7/8 to $53 5/8 after announcing that it expects Q1 revenues to be 2% lower than the same period in 1997, and earnings to be about 25% to 35% below the analysts' mean estimate and last year's EPS of $0.70... First Midwest Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CASH)") else Response.Write("(Nasdaq: CASH)") end if %> fell $1 3/4 to $23 after the bank announced it has begun an investigation into a $1.5 million loan loss related to mismanagement and possible fraud by a loan officer no longer with the company... Lattice Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LSCC)") else Response.Write("(Nasdaq: LSCC)") end if %> was cut $3 3/4 to $47 7/8 after Prudential lowered its rating on the chipmaker to "buy" from "strong buy."

Toronto Dominion Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TD)") else Response.Write("(NYSE: TD)") end if %> fell $2 3/4 to $48 1/4 after the Canadian money center bank signed a merger agreement, valuing its shares at C$72.49 per share, with Canadian Imperial Bank of Commerce. Early this year, rivals Royal Bank of Canada <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RY)") else Response.Write("(NYSE: RY)") end if %> and Bank of Montreal <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMO)") else Response.Write("(NYSE: BMO)") end if %> agreed to merge, but that deal hasn't closed yet.

After a weeklong run up, Internet companies took a beating today in very heavy trading as content aggregator Excite Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> excited few investors, falling $15 13/16 to $75 13/16 after reporting a Q1 loss of $0.28 per share, an improvement over last year's loss of $0.38. Rival Yahoo! Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> lost $7 1/4 to $121 1/2, Infoseek Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> tanked $7 1/2 to $38 11/16 on nearly 23.5 million shares traded, and Lycos Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> plunged $9 9/16 to $68 7/8. Meanwhile, Internet software company Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> gave back $2 1/2 to $23 1/16 on volume of more than 15 million shares after rising yesterday on rumors that it might be acquired by Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %>. Electronic payment software and services company CyberCash Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYCH)") else Response.Write("(Nasdaq: CYCH)") end if %> was cut $5 3/16 to $21 11/16 after issuing a statement saying "there have been no discussions of an acquisition of CyberCash." The company's stock surged $6 1/16 yesterday on rumors it was being taken over, possibly by Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>. Spyglass Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPYG)") else Response.Write("(Nasdaq: SPYG)") end if %> also had a tough day, dropping $2 7/8 to $11 15/16.

Earnings Movers

SunGard Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SDS)") else Response.Write("(NYSE: SDS)") end if %> down $2 1/8 to $37 13/16; Q1 EPS: $0.25 (before charges) vs. $0.21 last year; Estimate: $0.25

Verilink Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRLK)") else Response.Write("(Nasdaq: VRLK)") end if %> down $1 1/2 to $9; Q3 EPS: a loss of $0.03 vs. earnings of $0.06; Estimate: $0.06 loss

Computer Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPRD)") else Response.Write("(Nasdaq: CPRD)") end if %> down $3 7/16 to $23 3/16; Q1 EPS: $0.23 (before charges) vs. $0.19 last year; Estimate: $0.22

Paul-Son Gaming Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSON)") else Response.Write("(Nasdaq: PSON)") end if %> down $1 1/8 to $8 1/4; Q3 EPS: a loss of $0.10 vs. earnings of $0.17 last year

Elantec Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELNT)") else Response.Write("(Nasdaq: ELNT)") end if %> down $1 1/4 to $9 1/4; Q2 EPS: $0.14 vs. $0.01 last year; Estimate: $0.07

FOOL ON THE HILL
An Investment Opinion
by Dale Wettlaufer

More on Cendant

In yesterday's Fool on the Hill, Alex Schay looked at the nearly 50% decline in the shares of Cendant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %>, the consumer services giant that revealed accounting irregularities at its CUC International divisions. The doomsayers finally had their day with the company yesterday, pointing out that they had detected overstatement of earnings all along. What they had detected is the existence of accrual accounting, which is different than the cash-based accounting systems that are easier to grasp.

Under an accrual accounting regime, not all cash that is taken in is counted as revenue at the time that it is taken in. Not all cash outlays are considered expenses at the time that those outlays are made, either. This concept seems especially difficult for some of the critics to come to grips with when a business cycle lasts longer than the standard accounting cycle of one year. Just because tides and harvest moons can be divided into neat fractions of the time that it takes the earth to revolve around the sun once doesn't mean that a business relationship can be broken down into a neat fraction or multiple of the time it takes for an earthly round-trip.

The problem the critics have is that they don't believe that the length of time a customer will stay a customer of Cendant is a certain thing. Since they contend that the nature of the relationship is uncertain, then the policy of capitalizing and amortizing marketing expenses becomes more imprudent the longer the amortization period is. To a certain degree, though, all modern business relies on making estimates for its accounting accruals. That much is clear if you break down the process by which a company such as Boeing accounts for the fulfillment of a large contract with American Airlines, how an insurance company accounts for the revenues and expenses of insuring its customers against an earthquake, how a utility capitalizes interest expenses while a huge power generation facility is being built, and how a bank making a number of loans sets up credit loss reserves and defers income recognition on certain loans.

In fact, when one looks at the seemingly simple mechanics of accounting for inventories and cost of goods sold, one might find that the substance of a manufacturing company's accounting isn't so simple. Accounting for gross profits isn't as simple as taking the difference between the sale price of a good and deducting the cost of the raw materials in the product.

For most manufacturers, there is a value-added component in its inventory, which accounts for the heat, light, labor, and in some instances, the managerial overhead devoted to the process of turning raw materials into finished goods. Inventory could sit on the shelf for months and months without much action on the revenue line. Though the company has disbursed cash for the labor and raw material components found in that inventory, that cash outlay hasn't gone through the income statement. The value of those expenditures can be found as assets on the balance sheet as inventory in the raw materials, work-in-process, and finished goods. Only when it is turned into revenues (or written off) will the cash outlays for inventory be turned into expenses. When some investors seem shocked that there is a fraud being purported because expenses have been stored as assets until the associated revenues are recorded, they should realize that this is all part of the way that modern enterprises account for the flow of cash through the company.

It sometimes seems that the gadflies don't want to mention the statement of cash flows in condemnations of companies such as America Online or Cendant. Yes, those poor, dumb mutual fund managers that are buying into these frauds -- they need protection against the Eastern money changing establishment and its wicked accrual accounting way. Let's take a look at Cendant's cash flow statement and see what's going on there. (AOL users, expand screen to view table.)

                          YEAR ENDED  DECEMBER 31, 1997 
                    ------------------------------------- 
 OPERATING ACTIVITIES 
  
 Net income                                        $55.4 
 Merger-related costs and other unusual charges  1,147.9 
 Merger-related payments                          (441.5) 
 Adjustments to reconcile net income 
  to net cash provided 
  by operating activities 
  Depreciation and amortization                    256.8 
  Membership acquisition costs                    (663.4) 
  Amortization of membership costs                 617.6 
  Effect of changes in fiscal years of 
  pooled entities                                  (66.9) 
  Deferred income taxes                            (42.5) 
 Increase (decrease) from changes in: 
  Receivables                                     (287.3) 
  Accounts payable and other current liabilities  (192.6) 
  Deferred income                                  162.4 
  Other                                            (71.0) 
                                                --------- 
                                                   474.9 
                                                --------- 
  
 Management and mortgage programs: 
  Depreciation and amortization                  1,121.9 
  Mortgage loans held for sale                    (388.0) 
                                                --------- 
                                                   733.9 
                                                --------- 
 NET CASH PROVIDED BY  
 OPERATING ACTIVITIES                            1,208.8

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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool Editing Brian Bauer (TMF Hoops), another Fool Jennifer Silber (TMF Amused), Fool at last