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Bryce Iwata Acc 660 1/29/2002 America Online Inc. In 1995, America Online Inc. (AOL) experienced its first net operating loss of $33.6 million since its incorporation in 1992. There were many factors that contributed to the financial deficiency. It was this deficiency that spurred controversy with AOL’s stock price and its accounting practices. AOL’s stock price was well overpriced. Some investors were speculating that AOL would be very profitable in the future, which sparked the high stock prices. However, there were also many investors that thought the prices were inflated and the bubble would burst. These investors decided to sell the stock short and profit from the decline in price. Investors who sold their stock short had good reasons. The industry has many competitors like CompuServe and Microsoft. Also, there was a threat of new entrants since it was easy to get into the industry. There were also alternatives to the AOL product that were a lot cheaper or free. Other indications of inflated stock prices were that Apple Computer hedged its investment in AOL, which locked in its profits to 5.7 percent. Also, AOL’s executives sold some of their stock for sizeable profits. AOL’s accounting practices were also questionable. AOL amortized its software development over a period of five years. This is unusual since the software is usually obsolete in less time. Also, AOL capitalized its subscriber acquisition cost, which its competitor CompuServe did not. Other things that AOL capitalized was the marketing costs associated with acquiring a customer. By amortizing these costs, AOL was able to spread its expenses over a period rather than recognizing it in the year it occurred. AOL had many questionable events with its accounting practices and its financial performance that lead to the sharp decline in its stock price. Prior to the price decline, investors were buying the stock at a high price based on speculation that the company will do better financially. However, some people knew the prices were inflated and sold their shares short. These people ended up making a lot of money.
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