© 2000 John Petroff
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© 2000 John Petroff |
1)- Defining the industry of a company
The problem with industry definition stems from the product line combination of the company under study and the combination of product lines that the companies included in the industry statistics have. Take for instance a bed and breakfast inn that needs to be compared to similar establishments. Should it be compared to hotels, motels, maybe to restaurants, or only to bed and breakfast inns? The answer could be either or neither. Some bed and breakfast inns derive more revenues from recreational services (such as horse back riding, canoeing, skiing) than from room rentals. In some cases, meals are the largest source of income. In such cases one may consider separating financial results of these two activities and study them with the help of statistics on recreational sport establishment or restaurants, respectively . But that may be too demanding in terms of accounting work, especially for a small operation. In fact, it turns out that the US Bureau of Census indicates that bed and breakfast establishments are classified as such even if they derive more revenue from auxiliary services.
The requirement of SFAS 131 to disclose revenues, earnings and assets by segment of operations is certainly a major improvement over what was reported in American annual report in the previous century. But knowing that there are different product lines does not solve the problem, it only defines it more clearly. Most companies do not have just one product, and defining their main line of business may be far more complicated than in the case of the bed and breakfast. The difficulty that this creates was already touched upon in Chapter 9 Section D. It is then necessary to use comparative statistics with a broader definition (e.g. compare the bed and breakfast to all establishments providing accommodations, i.e. NAICS 72 which includes all accommodation and food services). This erodes the precision of the comparative data because the firms included in the sample can now be engaged in significantly different lines of business. Another approach would be to build statistics that are combinations of several industries, but this is only conceivable when an analyst devotes several years studying just one company.
See review questions Q-14A1.1 through Q-14A1.4.
See research assignment R-14A1.1.
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