accounting information

Other Characteristics of Accounting Information

When financial reports are generated by professional accountants, we have certain expectations of the information they present to us:

We expect the accounting information to be reliable, verifiable, and objective.
We expect consistency in the accounting information.
We expect comparability in the accounting information.
1. Reliable, Verifiable, and Objective

In addition to the basic accounting principles and guidelines listed in Part 1, accounting information should be reliable, verifiable, and objective. For example, showing land at its original cost of $10,000 (when it was purchased 50 years ago) is considered to be more reliable, verifiable, and objective than showing it at its current market value of $250,000. Eight different accountants will wholly agree that the original cost of the land was $10,000—they can read the offer and acceptance for $10,000, see a transfer tax based on $10,000, and review documents that confirm the cost was $10,000. If you ask the same eight accountants to give you the land’s current value, you will likely receive eight different estimates. Because the current value amount is less reliable, less verifiable, and less objective than the original cost, the original cost is used.

The accounting profession has been willing to move away from the cost principle if there are reliable, verifiable, and objective amounts involved. For example, if a company has an investment in stock that is actively traded on a stock exchange, the company may be required to show the current value of the stock instead of its original cost.

2. Consistency

Accountants are expected to be consistent when applying accounting principles, procedures, and practices. For example, if a company has a history of using the FIFO cost flow assumption, readers of the company’s most current financial statements have every reason to expect that the company is continuing to use the FIFO cost flow assumption. If the company changes this practice and begins using the LIFO cost flow assumption, that change must be clearly disclosed.

3. Comparability

Investors, lenders, and other users of financial statements expect that financial statements of one company can be compared to the financial statements of another company in the same industry. Generally accepted accounting principles may provide for comparability between the financial statements of different companies. For example, the FASB requires that expenses related to research and development (R&D) be expensed when incurred. Prior to its rule, some companies expensed R&D when incurred while other companies deferred R&D to the balance sheet and expensed them at a later date.

How Principles and Guidelines Affect Financial Statements

The basic accounting principles and guidelines directly affect the way financial statements are prepared and interpreted. Let’s look below at how accounting principles and guidelines influence the (1) balance sheet, (2) income statement, and (3) the notes to the financial statements.


Cheap Gas Is Bad for the World
Elon Musk Says Cheap Gas Is Bad for the World

Fight the propaganda of the fossil fuel industry, says the energy entrepreneur.

Tesla CEO Elon Musk is worried that low cost oil and gasoline are “really quite bad for the world,” and “for the future.”

Musk made the remarks on Wednesday at the World Energy Innovation Forum, a conference organized by one of Tesla’s earliest investors and held inside a section of Tesla’s factory in Fremont, Calif.

The industry mogul has a full day on Wednesday. Tesla TSLA 0.80% is expecting to announce its first quarter earnings on Wednesday afternoon, a couple hours after his onstage interview. (For what to expect from Tesla earnings, read this outlook).

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Musk’s concern over low gas prices aren’t just because they could effect sales of Tesla’s electric cars. When gas is cheaper, consumers are usually more eager to buy gas-guzzling cars and less enthusiastic about gas-efficient cars and electric cars. Musk is worried that cheap gas will delay a transformation for cars and electricity generation with lower carbon emissions, which will mean a delay in fighting global warming.

As Musk described it, low-cost gasoline and oil are “weakening the economic-forcing function to sustainable transport and clean energy in general.”

Musk emphasized in the interview that massive subsidies and lobbying by the fossil fuel industries have stacked the deck against clean energy and electric cars. The oil and gas industries are receiving $6 trillion in subsidies per year and “every gasoline car on the road has a subsidy,” he remarked.

The most effective way to address the gas car subsidy, according to Musk, would be to implement a carbon tax, which would add on taxes for emitting carbon emissions. However, considering passing a carbon tax is extremely difficult in the U.S. for political reasons, most states and the federal government are instead opting for offering subsidies for electric cars, he acknowledged.

Tesla and SolarCity SCTY -10.59% —the solar panel installer where Musk is the Chairman and major investor—have both need a lot of entrepreneurial skill and thinking because selling solar panels and electric cars are economically “an uphill battle,” said Musk, stressing that’s because the externality of carbon pollution is “not priced correctly.”

The lack of economic mechanisms to account for the negative effects of carbon emissions “makes the problem much harder,” said Musk, explaining because “you’re competing against something that has a $6 trillion per year subsidy.” “That makes it really difficult,” he lamented.

One solution that Musk sees to this dilemma is to educate consumers and “appeal to the people,” “to revolt against this.” Musk called upon consumers to “fight the propaganda of the fossil fuel industry, which is unrelenting and enormous.”

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