what is wrong with this picture??

[runningman]

Citigroup posts $1.6 Billion profit in the first quarter. Now needs $10 billion more. Will it ever end?? I find it angrily hilarious that everyone is talking about Chrysler and GM while Citi and AIG come in the back door and take the loot. How do these CEO's stay in power with a crisis that was caused by them.

Citi posts profit article

http://www.bloomberg.com/apps/news?pid=20601101&sid=a3ViOFCsExxk&refer=japan

Citi needs capital

http://www.cnbc.com/id/30526954

Which is it?

[Miroslav]

Re: what is wrong with this picture??

Now...I'm not saying that Citibank necessarily deserves / needs more bailout money because I'm not well versed on the specifics of their situation. But what I can tell you is that from a financial accounting standpoint, there may be nothing wrong with that picture. It quite rationally can be both.

One of the principle points of accrual accounting is that profit does not equal cash flow. There can be all kinds of things that impact income statement profit that have no impact on the enterprise's cash position in that same time period - such as a credit sale, the reversal of an accrual, a change in depreciation treatment, etc. A big one for banks is in relation Mark-to-Market rules, which govern how they report the value of many of their assets (again, ZERO cash impact in that). There have been some changes there that give greater flexibility to banks, which could help their income statements in the coming quarter. Conversely, many things can occur with a company's capitalization and cash position that has no impact whatsoever on the income statement.

So basically that means that it's perfectly possible that Citi's profit on the income statement could look to be up in one period while its cash position reported on the balance sheet could actually have deteriorated in the same time period. Furthermore, even if they made a profit this quarter, that doesn't necessarily mean that: (1) the earnings are robust enough for them to be sufficiently capitalized, and (2) the earnings will necessarily continue in the future; it could have been due to a one-time event such as a sale of a division.

Again, I'm not saying that this is Citi's case; frankly, I didn't study their earnings very much. But I do know that from an accounting standpoint, this kind of situation happens regularly and there is nothing necessarily wrong with it. You'd need a lot more data and analysis to conclude that there is really something fishy going on here.