It is the contention of the authors (Professors Ray Ball and Philip Brown) that accounting theorists themselves are in agreement with that belief. To support the opinion, Canning was quoted as stating that measures of net income are purportedly without factual basis and that it is only the figure which resulted after the accountant has completed the procedures which were used to arrive at the number. It is as if the paper advances the theory that the net income shown in the financial statements of a corporation is not its actual earnings.
Some other factors and variables which have any relation or bearing on the corporation and its operations have to be considered. For instance, a company is in the business of selling bell-bottom jeans. On January 31, 2010, it has reported in its financial statements for the year that ended on December 31, 2009 a net income of $210,000. In the first week of December, 2009, sales dropped by 80%. It was discovered that the erstwhile trendy bell-bottom pairs quickly became out of fad. If the suggestion of Ball and Brown is to be followed, the final net income of $210,000 is not the ultimate determinant of the earning capabilities of X Company.
Curiously, however, the authors admit though that it is not safe to presume that the income figure is without use just because it has no meaning in substance, adding that the data and information contained therein and the timeliness of making those items available are important for evaluation. The paper actually tries to convey the idea that the data produced by accounting records and summarized by the accountant in the financial statements are not the sole gauge to measure whether the company really makes profits. While the work of the distinguished professors is impressive, it goes beyond the role of accounting as its founders or creators possibly intended it to be and to function as such and as the general principles behind it unequivocally manifest.
The process records, classifies and summarizes transactions and events significantly in money terms. Simply put, it deals with things of the past and the recording pertains to those circumstances which are financial in character.
Whatever the recording, classifying and summarizing activities produce are then interpreted and presented in the financial statements. (Horn, Frederick [internet]). Within the ambit of its general precepts, accounting always presumes the entity to be a going concern in that it exists and will continue to exist. (going-concern-principle. BusinessDictionary. com. [internet]). Financial statements will not tell the readers about how the corporation will survive owing to the downtrend in sales. As a matter of course though, and as the full disclosure requirement dictates, information of possible material losses has to be mentioned in the notes to financial statements.
(Accounting Concepts. QuickMBA. [internet]). Hence, huge receivables which appear to have apparently no chance of collection must be explained as probable bad debts in the ensuing year. In the same manner, corporate trade liabilities subject of litigation must be so disclosed. It is confessed that prospective investors or stockholders, among other factors, look at the income figures of the company where they desire to invest. There is no logic putting one’ s money in a venture that is losing. Still, there appears no preparedness yet to evolve accounting into economics, particularly that which involves forecasting.
It is true that the field of accountancy has in relatively recent developments embarked on the field of management accounting. Nonetheless, the latter is not an exact science. (Management Accounting is a science but not an exact science. June 19, 2006.[internet]). While accountants may have the rare opportunity to more or less predict financial conditions and situations based on historical data, it has to be taken into serious consideration that analytical projections are no guaranty to determine what happens next.
So many of the supposed financial and economic wizards foresaw otherwise when James Chanos believed Enron would crash. (Barboza, David. January 7, 2010.[internet]). It did. The experts were wrong. One man was correct.
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