week 1 discussion 2 10

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Discussion 2: Accounting Principles

Chapter 1 discusses ethics in business and accounting. The notes to the financial statements describe the accounting principles used by a company to record its transactions. Accountants apply the convention of conservatism when analyzing economic events and recording them. The following is a definition of conservatism:

In the application of accounting principles and the development of estimates, accountants should be conservative. Given choices between various methods of recording economic events, accountants should apply principles that result in revenues being stated at lower amounts versus higher amounts and expenses being stated at higher amounts rather than lower amounts. In general, accountants should apply accounting principles that would tend to understate revenues, net income and assets versus overstating them.

What are some of the ethical issues of selecting accounting principles for a company? Do you believe accountants have been properly conservative in the past few years with financial statement presentation? Why?

As a potential investor, what risks do you want to identify with financial statement analysis?

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