Page 34 - Finance for Non-Financial Managers

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The Structure and Interrelationship of Financial Statements
ARTistic Financial Reports
Unlike the “creative” financial reporting we’ve seen from some
major companies in the news in the past couple years,ARTistic 15
reports are the cornerstone of sound reporting.The acronym means:
• Accurate—prepared with sufficient accuracy to be relied upon,
without such a high accuracy requirement that they are too expen-
sive or too time-consuming to produce.This concept in financial
reporting is called materiality. (Generally, a matter may be judged
material if the user of the financial reports would be likely to be
influenced by knowing it. Materiality is usually considered in terms
of the amount of money involved relative to the whole.)
• Relevant—presented in a way that is useful to those who must
use them.A detailed listing of transactions with no totals or expla-
nation might be accurate, but it is of little use to anyone and so not
relevant for any business purpose.
• Timely—produced in time to be useful to those who need it.A
totally accurate, relevant report that comes out three months late
is not of much value because managers will have had to make deci-
sions before it was available, in order to run their company.

While accounting rules may change over time to properly
reflect changing business models and new types of business
transactions, those changes must keep in mind the responsibility
that accounting has to all its constituents—the responsibility to
produce information that they can rely on. As we will see, that
isn’t always as easy as it sounds, but it is every bit as important
as it sounds. That is why accounting as a business process
needs to remain fairly stable, evolving only after very careful
thought to the implications of reporting transactions differently
than they might have been recorded previously. Remember that
a major use of financial information is comparison with similar
information from earlier periods to assess the degree of any
changes. If the accounting methods are different, the conclusions
may be flawed. As we have learned from the reports of execu-
tive shenanigans in recent years, it is far too easy to create
incorrect conclusions if the rules allow too much flexibility.
In addition to stability, one of the key characteristics of the
accounting process is repetition. The accounting process