Today’s goal is to determine whether or not American Capital Agency Corp. (AGNC) wrote down any inventories or receivables as a charge to their surplus account since 2008. Many companies did this during the Great Depression in order to make the next year’s income numbers look better than they really were.
“If the receivables and inventories were written down to an unduly low figure on December 31, 1932, this artificially low “cost price” would give rise to a correspondingly inflated profit in the following years.” – Securities Analysis chapter 32 section on manufactured earnings examples.
It appears to me that AGNC did not write down any inventories or receivables as a charge to surplus from 2008 to 2010. Gains and losses in the values of its agency securities portfolio, hedges, and other assets appear on the current income statement for Q2 2010. Therefore, I don’t think that AGNC is charging extraordinary losses to its surplus account in order to inflate its profit in the following year. No adjustments to the income account are necessary for this category of analysis.
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