Understanding Finance- Mark to market accounting

A junior excutive shopping for goodsMarket to market accounting is kind of a big deal. Captains of industry like Jeffrey Skilling adopted mark to market accounting when he became CEO of Enron. But what exactly is mark to market?

Simply put, mark to market accounting is a practice rooted in the history of corporate espionage. Corporate spies would account for times when marks, or in this case, corporate executives, would go to the market to buy groceries. When performed en masse, the theory is that the cumulative action of all corporate executives at grocery stores could provide accurate intelligence into the company’s conditions. For example:

  1. Lots of caffeine – When execs purchase a lot of caffeine, it tends to mean that they’re up to something big, so they’re working long hours. Expect big news.
  2. Lots of fiber – Execs hitting up the Kashi aisle are probably constipated. This means that they’re eating lots of expensive meat, which is backing them up. Expensive meat means that they’re sitting on a lot of cash. Expect higher than expected earnings.
  3. Lots of alcohol – It’s Tuesday. Nothing really to learn here – execs just like to buy alcohol on Tuesdays.

Though this sounds like fancy pants accounting and voodoo math, it has been shown to work on numerous occasions. For example, corporate spies found that in 1983, when Randolph and Mortimer Duke cornered the frozen concentrated orange juice market, they consumed copious amounts of caffeine in the days leading up to the release of the orange crop report, and they ate lots of fibrous foods as they expected a large influx of cash. However, once they found out that his crop report had been tampered with, they proceeded to drink a lot (because it was on a Tuesday).

So that’s really all there is to mark to market accounting. If you have a firm grasp of mark to market, you can also make some educated guessing around what mark to lingerie model accounting is too.

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