Accounting theory and practice, Volume 2 (of 3)

by Roy B. Kester

2. Formal report to stockholders.

3. As a basis for application for credit.

4. For publication or report to regulating or supervising commissions.

5. For annual report to the state.

6. For advertising purposes to float new issues of bonds, preferred stock, etc.

When used for some of these purposes, oftentimes condensation is made a convenient method of bringing about a misrepresentation of true condition. Of course, no justification can be found for this.

Emphasis has already been placed on the necessity of choosing titles and captions which shall indicate clearly the nature and content of the transactions or data recorded thereunder. Statements of condition which are misleading, whether with intent or by chance, are to be condemned. As H. R. Hatfield[10] so well summarizes, the lack of clearness and consequent misunderstanding of the balance sheet are due in the main to three causes: (1) vagueness of terminology; (2) purposeful misrepresentation; and (3) the very nature of accounting itself which so largely rests on estimates rather than on facts of definite determination. Some of these troubles have their origin in the form of the balance sheet, the manner of showing the items; while the others inhere in its content. It is to a study of the content of the balance sheet from the standpoint of the statement of values, with the emphasis on quantitative analysis, that we now turn.

CHAPTER V
GENERAL PRINCIPLES OF VALUATION

Content of the Balance Sheet

The problems of content and valuation strike at the very heart of the balance sheet. Form, framework, and method of presentation are important and their usefulness should not be discounted. Particularly is this seen to be true from the standpoint of availability of the information presented and facility in its interpretation; but the meat of the balance sheet is its content. In connection with this, two points demand consideration, viz.: (1) what items shall be admitted to a place in the balance sheet; and (2) on what basis shall they be admitted, this latter being the problem of valuation.