Accounting For Dummies®, 4th Edition

Chapter 7. Choosing Accounting Methods: Different Strokes for Different Folks

In This Chapter

• Realizing there's more than one way to skin a cat

• Comparing impacts of different accounting methods on financial statements

• Calculating cost of goods sold expense and inventory cost

• Dealing with depreciation

• Scanning other expenses

This chapter explains that the financial statements reported by a business are just one version of its financial history and position. Different accountants and different managers for the business could have presented different versions that would have told a different story. I take a no-holds-barred look at how the income statement and balance sheet depend on which accounting methods a business chooses and on whether the financial statements are tweaked to make them look better (while staying within the boundaries of accounting and financial reporting standards).

The amounts reported in the financial statements of a business are not simply facts that depend only on good bookkeeping. Here's why:

• A business has choices among different accounting methods for recording the amounts of revenue and expenses.

• A business can make pessimistic or optimistic estimates and forecasts when recording certain revenue and expenses.

• A business has some wiggle room in implementing its accounting methods, especially regarding the precise timing of when to record sales and expenses.

• A business can engage in certain tactics at year-end to put a more favorable spin on its financial statements. ...