C2-14 The following two statements have been taken directly or with some modifii

Question

C2-14

The following two statements have been taken directly or with some modifiications from teha ccounting literature. Each of them is taken out of context, involves circular reasoning, and or contains one or more fallacies, half-truths, erroneous comments, conclusions, or inconsistencies (interanlly or with GAAP).

Statement 1. Accounting is a service activity (true). Its function is to provide quantitative financial information that is intended to be useful in making economic decisions about and for companies. Thus, the accounting function might be viewed primarily as being a tool or device for providing quantitative financial information to management to facilitate decision making.

Statement 2. Financial statements that were developed in accordance with generally accepted accounting principles should be conservative.

Evaluate each of the proceedings as follows:

1. List the fallacies, half-truths, circular reasoning, erroneous comments or conclusions, and or inconsistencies.

2. Explain by what authority and/or on what basis each item listed can be considered to be fallacious, circular, inconsistent, a half-truth, or an erroneous comment or conclusion If the statement or a portion of it is merely out of context, indicate the context in which the statement would be correct.

Explanation / Answer

Definition of Accounting

“Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character, and interpreting the results thereof.”

Accounting is considered an art because it requires the use of skills and creative judgment. Recording pertains to writing down or keeping records of business transactions. Classifying involves grouping similar items that have been recorded. Once they are classified, information is summarized into reports which we call financial statements. Hiring an additional employee is qualitative information with no financial character. Hence, it is not recorded. However, the payment of salaries, acquisition of an office building, sale of goods, etc. are recorded because they involve financial value. Information is useless if they cannot be interpreted and understood. The amounts, figures, and other data in the financial reports have meanings that are useful to the users.

Financial Statements

Definition: Financial statements are a collection of reports about an organization's financial results, financial condition, and cash flows. They are useful for the following reasons:

The standard contents of a set of financial statements are:

       If a business plans to issue financial statements to outside users (such as investors or lenders), the financial statements should be formatted in accordance with one of the major accounting frameworks.

If financial statements are issued strictly for internal use, there are no guidelines, other than common usage, for how the statements are to be presented.

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