Question

Inconsistent Statements on Accounting Principles

The following two statements have been taken directly or with some modification from the accounting literature.

Statement 1. Accounting is a service activity. 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.

1 List the fallacies, half-truths, circular reasoning, erroneous comments or conclusioins 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 portion of it is merely out of context, indicate the context in which the statement would be correct.

Answer 1

Solution

Part 1 ).Please find the fallacies, half-truths, circular reasoning, erroneous comments or conclusioins and/or inconsistencies in both the statements

Statement 1 and statement 2 are half truths for below reasons :

1). tis function is to provide quantitative financial information

2).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: Half Truth

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

Part 2: Solution for 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

Statement 1). Please find correct definition as per AICPA:

AICPA also provided this definition: "Accounting is a service activity. Its function is to provide quantitative information, making primarily financial in nature, about economic entities that is intended to be useful in making economic decisions, inreasoned choices among alternative courses of action."

Statement 2). Apart from conservatism, following principles as per GAAP in preparing financial Statements

• Historical cost principle: Companies must account for and report the acquisition costs of assets and liabilities rather than their fair market value. This principle provides information that is reliable (removing the opportunity to provide subjective and potentially biased market values), but not very relevant. Thus there is a trend toward the use of fair values. Most debts and securities are now reported at market values.
• Revenue recognition principle: Companies should record revenue when earned but not when received. The flow of cash does not have any bearing on the recognition of revenue. This is the essence of accrual basis accounting. Conversely, however, losses must be recognized when their occurrence becomes probable, whether or not it has actually occurred. This comports with the constraint of conservatism, yet brings it into conflict with the constraint of consistency, in that reflecting revenues/gains is inconsistent with the way in which losses are reflected.
• Matching principle: Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with revenue can be established, cost may be charged as expenses to the current period (e.g. office salaries and other administrative expenses). This principle allows greater evaluation of actual profitability and performance (shows how much was spent to earn revenue). Depreciation and Cost of Goods Sold are good examples of application of this principle.
• Full disclosure principle: The amount and kinds of information disclosed should be decided based on trade-off analysis as a larger amount of information costs more to prepare and use. Information disclosed should be enough to make a judgment while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes or as supplementary information

Statement 1 could be correct when accounting is to be used by management of the entity

Statement 2 could be correct at the time of revenue recognition