To facilitate comparisons across companies (cross sectional analysis) and over time for a single company (time series analysis), it is important that accounting methods are comparable and consistently applied. However, accounting standards must be fl exible enough to recognize that diff erences exist in the underlying economics between businesses. Suppose two companies buy the same model of machinery to be used in their respective businesses. Th e machine is expected to last for several years. Financial reporting standards typically require that both companies account for this equipment by initially recording the cost of the machinery as an asset. Without such a standard, the companies could report the purchase of the equipment diff erently. For example, one company might record the purchase as an asset and the other might record the purchase as an expense. An accounting standard ensures that both companies should record the transaction in a similar manner. Accounting standards typically require the cost of the machine to be apportioned over the estimated useful life of an asset as an expense called depreciation. Because the two companies may be operating the machinery diff erently, fi nancial reporting standards must retain some fl exibility. One company might operate the machinery only a few days per week, whereas the other company operates the equipment continuously throughout the week. Given the diff erence in usage, it would not be appropriate to require the two companies to report an identical amount of depreciation expense each period. Financial reporting standards must allow for some discretion such that management can match their fi nancial reporting choices to the underlying economics of their business while ensuring that similar transactions are recorded in a similar manner between companies. Financial statements of two companies with identical transactions in the fi scal year, prepared in accordance with the same set of fi nancial reporting standards, are most likely to be: A . identical. B . consistent. C . comparable
To facilitate comparisons across companies (cross sectional analysis) and over time for a single company (time series analysis), it is important that accounting methods are comparable and consistently applied. However, accounting standards must be fl exible enough to recognize that diff erences exist in the underlying economics between businesses. Suppose two companies buy the same model of machinery to be used in their respective businesses. Th e machine is expected to last for several years. Financial reporting standards typically require that both companies account for this equipment by initially recording the cost of the machinery as an asset. Without such a standard, the companies could report the purchase of the equipment diff erently. For example, one company might record the purchase as an asset and the other might record the purchase as an expense. An accounting standard ensures that both companies should record the transaction in a similar manner. Accounting standards typically require the cost of the machine to be apportioned over the estimated useful life of an asset as an expense called
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