© 2000 John Petroff

B- The accounting function

The goal of the accounting function is to provide users with the information on the results of operations for a given period and the financial position of the firm on a given date. This information will help make decisions on the basis of a firm's ability to meet its financial obligations, and to continue to be a prosperous investment. More specifically, financial statements are used to evaluate the firm's performance in order to determine the value of the claim of any outside provider of funds. This goal is, for instance, underscored in the title of an article by Henry B. Reiling and C. Burton: "Financial Statements: Signposts as well as Milestones.", (Harvard Business Review, Nov 1972, p. 45), or the writings of a leading academic author on accounting, George Sorter: "Relevant Accounting". This future oriented nature of finance has already been stated several times in previous chapters. When judging an accounting system, it is precisely its ability to fulfill this function with its objective and conventions, that determines its quality.

1)-Accounting objectives:

To fulfill its goal, the accounting profession must prepare the financial statements with the following 5 objectives:
- relevance: all information that can affect future earnings, growth and vulnerability of the firm;
- objectivity: it implies that all numbers are

-reliable in the sense that they correspond to actual events that took place, and
-verifiable because they can be physically traced to such events;

- comparability: it means that the methods used by the firms are the same as those used in the past and the same as those used by other firms;
- clarity: the data must have a sufficient degree of simplicity so that it can be understood by a variety of users;
- timeliness: the most recent information is the most important to the users, therefore the financial statement must be issued promptly.

In addition to the 5 major objectives, the financial statements
-must emphasize substance over form, and
-have generality of purpose (i.e. not be directed to any specific user).

See review questions Q-6B1.1 and Q-6B1.2.

2)- Accounting conventions:

The accounting profession uses a set of conventions which are common to all, so that the same language and approach is used by all in the profession:
-entity: it is the unit of operations, a firm in most cases, or a corporation and its affiliated subsidiaries in a consolidated statement;
- accounting period: the financial year (or quarter) at the end of which the books are closed, it also usually coincides with the fiscal year;
- continuity: financial statements are prepared with an assumption that the firm is a going concern and will remain that way, otherwise an anticipation of liquidation must be stated;
- conservatism: no figure should give false expectations to an average reader;
- full disclosure: any event that could significantly affect any stated numbers must be made known to the reader;
- consistency: no departure in the method of preparation of the financial statements is vouched in order to permit comparability; but, if a change in method has occurred, its impact must fully explained;
- materiality: trivia is omitted.

See review questions Q-6B2.1 and Q-6B2.2.

3)- Publication of accounting standards and principles in the United States:

 

To meet its objectives, the accounting profession abides by standards and principles, which are its operative rules, and which assure uniformity and consistency throughout the profession. These standards and principles are contained in publications issued by various institutions:
- AICPA (American Institute of Certified Public Accountants at http://www.aicpa.org/) has issued
- ARB's (Accounting Research Bulletins by its Committee on
Accounting Procedures from 1938 to 1959),
- APB Opinions (prepared by the Accounting Principles board from
1959 to 1973);

- SFAS: Statements of Financial Accounting Standards are prepared by
the Financial Accounting Standards Board (FASB at http://www.rutgers.edu/Accounting/raw/fasb/) since 1973;

The SEC (Securities and Exchange Commission) has issued
- ASR's (Accounting Series Releases)
- and Staff Accounting Bulletins which are of lesser importance.
Aside from these, the NYSE (New York Stock Exchange) sometimes issues disclosure requirements for the companies listed on the exchange, and the AAA (American Accounting Association) publicizes research findings of accounting professors.

 

See review questions .Q-6B3.1 and Q-6B3.2

See research assignment R-6.5.

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