Historical Foundations of Financial Accounting (2)
Posted on December 29, 2008 - Filed Under Finance
The economic systems of the industrialized countries have grown enormously since the beginning, and financial accounting has become much more complex. However, the original reasons for accounting statements still apply: Bankers and other investors need accounting information to make intelligent investment decisions; managers need it to operate their organizations efficiently; and taxing authorities need it to assess taxes in an equitable manner.
It should be no surprise that problems can arise when translating physical assets and economic events into accounting numbers. Nevertheless, that is what accountants must do when they construct financial statements. To illustrate the translation problem, the numbers shown on the balance sheet to reflect a business’s assets and liabilities generally reflect historical costs and prices. However, inventories may be spoiled, obsolete, or even missing; land, buildings, and equipment may have current values that are much higher or lower than their historical costs; and money owned to the business may be uncollectible. Also, some liabilities, such as obligations to make lease payments, may not even show up in the numbers. Similarly, costs reported on an income statement may be understated or overstated, and some costs, such as depreciation, do not even represent current cash expenses. When examining a set of financial statements, it is best to keep in mind the physical reality that underlies the numbers and also to recognize that many problems occur in the translation process.
Taken From : HEALTHCARE FINANCE
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