When you hear "incentive," think "compensation."

According to the National Association of Shmoop Accounting Research, D.C. division, 147% of company action is determined by the manner in which its C-level officers are paid. So accounting-based incentive is actually a really important determiner in the evaluation of the prospects of a company. Executives get paid in both cash and equity, and the size of those payments is often determined by metrics that need accounting magic to be applied to them to determine whether or not the executive really did grow EBITDA 18%, and thus vest into her 300,000 options.

Why the difficulty? EBITDA is not a tightly-defined GAAP term. It's largely made up by accountants and creative application of metrics can move the calculation of EBITDA up or down a whole lot. So if you're an accountant at a corporation and the CEO suddenly becomes very friendly with you around bonus calculation time, accept her hot cocoa with great cynicism.

Related or Semi-related Video

Finance: What is GAAP?21 Views

00:00

Finance allah shmoop what is a gap Yeah not this

00:09

Nor this Nor this gap is an accounting term that

00:13

stands for generally accepted accounting principles And it is basically

00:18

the accounting code of hammurabi or the ten commandments that

00:22

is There are lots and lots and lots of ways

00:24

that clever bean counters could define and or account for

00:28

the notion of profits lots of ways to recognize revenues

00:32

versus sales and lots of ways to think about how

00:34

much that ten commandment frisbee factory is appreciating in value

00:39

each year Well the world according to gaff outlines the

00:42

structure under which accountants must you know count beans the

00:45

basic idea Well sort of in the vein of the

00:47

golden rule that is do unto others as you'd have

00:50

them do unto you Gap requires that accountants always present

00:54

their numbers in the most reasonably conservative manner possible such

00:58

that they never overstate how profitable or how well the

01:02

company is doing Gap is the framework the map the

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religion and the destinations we want to go inside this

01:09

neck of the accounting woods are three income statement cash

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flow statement balance sheet will none of these three key

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elements mean anything however unless they all follow the same

01:20

rules they're linked like gears in an overpriced swiss watch

01:25

and the eighteen zillion individual rules on their own mean

01:28

nothing like what is revenue Is it a dollar you

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collect in cash at a video game arcade booth Is

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it the promise to pay that dollar in a year

01:37

Well there are lots of ways to account for this

01:39

notion of revenue so don't think of gaff isa siri's

01:42

of rules rather think of it as this you know

01:45

key mathey kind of finance e a county religion it's

01:49

all about quote doing right unquote and part of that

01:52

issue is a natural conservatism that has to come with

01:56

it kind of amish you'd think would be a good

01:59

gap Accountants Well if you're thinking about how to account

02:02

for five dollars promised to you in a year well

02:04

you have to recognize that there is risk you won't

02:07

collect it and that money a year from now is

02:09

worth less than its face value and well that you

02:12

should categorise those revenues way off in the distance differently

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from how you'd categorize collecting the five dollar bill in

02:19

cash that day and putting it in your cigar box

02:22

there right So gap is basically the force in accounting 00:02:26.44 --> [endTime] May it be with you

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