Some more thoughts

Your new knowledge about accounting invites reflection on how certain information is construed.

Results: A figure open to debateA company’s actual and absolute result can only be truly determined at the end of itslifecycle by looking at the difference between what was invested and what remainsafter it is liquidated. Even then, the value of the various contributions made over timeis subject to adjustments.

Companies calculate their results by periods of time, normally by year.For reporting, economic, and legal reasons, this calculation CANNOT be postponed until thetime of liquidation.This means that, under the accrual principle, expenses and revenue are adjusted by financialyears.It might seem that management activities follow the same start-and-end cycle, but theyactually continue without a break, as long as the company is not liquidated or wound up.

Some more thoughtsResults: A subjective figure

Therefore, a periodic result is a subjective metric. This is so because revenue andexpenses are often calculated on the basis of estimates or assumptions about a largelyunknown future.

In this sense, the most relevant areas are possibly those related to:

The cost of goods or period expenses

The valuation of inventories

Provisions

Depreciation

Accrual calculations

A company may report profit in a financial year, while a similar company may reportlosses instead for that same year. This happens when a company uses moreconservative calculation criteria, such as an increased depreciation.

Some more thoughts

Two conclusions may be drawn from this:

Results can vary according to the assumptions used for calculation purposes:there is no such thing as an absolute result for any given period.

Consequently, results should be considered with caution and bearing in mindthe assumptions used.

Accordingly, what matters in accounting is knowing what we (or a third party, ifwe rely on accounting information from other sources) have done, rather thanchoosing this or that option.

The greater the significance of the relevant factors or areas explainedbefore, the more important it will be to identify the criteria used inpreparing the Financial Statement.

Such limitation does not mean, however, that accounting should be rejected as anineffective tool for learning about a company’s situation.

Through accounting we are able to summarize a long list of complex andheterogeneous events in the form of a Balance Sheet, a Profit and Loss Statement, ora Cash-Flow Statement.

This is meaningful enough, even if the summary provided is not a perfect one.

It’s a wrap!

The information contained in the Financial Statements is perfected and completed bya Report or by Notes to the Financial Statements. These documents contain aseries of explanations and are an integral and inseparable part of the Statements.

A true and fair view

RocíoLópez, Course author

“Despite the limitations of financial accounting, as explained inthis course, it is indeed worth having a true and fair view ofthe financial situation, equity, and profit or loss of a company.

We talk about A true and fair view, but not of THE trueand fair view of the company’s situation, becausedifferent, but equally accepted accounting criteria lead todifferent Financial Statements.

Therefore, the situation of the company described by its financial accounting isjust a view of it, albeit a reasonable and reasoned one.Therefore, Accounting Information Systems should be designed in such a way soas to ensure that sufficiently reliable and sufficiently useful information about acompany is available.”