How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, 8th Edition

CHAPTER 20

CHOOSING ACCOUNTING METHODS AND MASSAGING THE NUMBERS

Chapter Preamble

The accounting methods used to record the activities of a business and to prepare its financial statements should conform to authoritative financial accounting standards. These standards are always in a state of flux to one degree or another. The accountant should keep abreast of the latest changes in the standards. The shareowners and creditors who read the financial reports of a business are entitled to assume that its financial statements comply with current accounting standards, and that there are no serious violations of these standards.

The primary purpose of an audit of a financial report by an independent certified public accountant (CPA) is to ensure that proper accounting methods are used by the business and that it makes proper disclosure in its financial report. Chapter 21 discusses audits of financial reports by independent CPAs.

As you may have gathered from the chapter’s title, the numbers reported in its financial statements depend on which accounting methods the business uses and whether the numbers have been massaged, or manipulated by the business. For that matter, the financial statements could be fraudulent and provide bogus numbers for sales revenue and expenses. Or a business may discover later that financial statements it has issued had serious errors. In this situation, the business issues a restatement of its original financial statements to set the record straight.

Financial ...