Page 28 - Finance for Non-Financial Managers

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Counting the Beans
Are All Fords Created Equal?
Two companies purchase identical Ford Taurus automobiles.
Company A will use its vehicle for occasional corporate vis- 9
itors, so it’s expected to last about five years. Company B will use its
vehicle as part of its fleet of taxis, so it’s expected to last about 18
months. Over which of the following periods of time would an
accountant depreciate or expense the purchase?
1. five years
2. 18 months
3. three years (an average)
4. different lives in different companies, based on their actual useful
life in those companies
The choice will affect the profits of any company that buys cars.The
choices that companies must make to reflect their particular realities
might lead to confusion and misstatement. However, setting one
absolute rule for all companies would create different confusion, per-
haps greater.Thus arose the concept of generally accepted accounting
principles, rather than absolute rules.These principles have been the
basis for reasonable estimates and unreasonable abuses for many
years, with the abuses getting a lot more press as this is written.
Incidentally, the answer is 4.

you understand how to read and use these primary financial
statements, prepared in accordance with GAAP. We will also
discuss other, special-purpose reports that company manage-
ment may find more useful for internal purposes. Our com-
ments will in all cases assume the use of GAAP, except where
we specifically note exceptions.

The Relationship of Finance and Accounting to the
Other Departments

The Finance Department in every company has in theory two
primary areas of responsibility:
• To safeguard the assets of the company by properly
accounting for them, instituting internal controls to pre-
vent their misuse or loss, and generally monitoring their
proper use. In this role, Finance becomes something of