Chapter 8

Financial Accounting Issues

IN THIS CHAPTER

Disclosing changes in owners’ equity

Realizing there’s more than one way home

Grasping the impacts of alternative accounting methods in recording profit

Taking a closer look at cost of goods sold and depreciation expenses

Scanning the revenue and expense radar screen

In this chapter, I raise the topic of disclosure in external financial reports to the creditors and investors of a business. Actually, accountants prefer the term adequate disclosure. Accountants certainly don’t like the term full disclosure, which could involve a very high legal standard that might require providing highly sensitive information. Businesses don’t have to reveal everything in their external financial reports. Businesses are justified in protecting their competitive advantages by withholding disclosure about some matters. At the same time, business financial reports should reveal all the information that the creditors and investors are entitled to know about the business.

The three primary financial statements — income statement, balance sheet, and cash flow statement — constitute the bedrock disclosure by a business. Public companies are subject to many rules regarding the disclosure of information in addition to their three basic financial statements. Private companies should carefully consider what information they should disclose beyond their three primary financial statements in accordance with financial reporting standards. Virtually all businesses ...

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