The Meaning and Significance of Financial Statements
by MALCOLM M. DEVORE Partner, Executive Office
Presented before the National Association of Accountants,
Portland, Oregon, Chapter—September 1967
EACH DAY brings new evidence to those of us in public accounting that a great lack of understanding exists in many quarters of the meaning and significance of financial statements issued by companies organized for profit.
This should not come as any surprise to us, but it becomes increasingly
apparent that we must do all in our power to promote proper appreciation of the function of these statements and of the role of the accounting profession in relation to them.
Much of the misunderstanding we encounter derives from the unfortunate
impression of "precision" conveyed to the layman's eye by the very format and appearance of the statements themselves. When items are carried out "down to pennies," the layman thinks this implies absolute precision, and the mere fact that both sides of the balance sheet "come out even" tends to work an almost hypnotic effect on him.
The most serious misconceptions, however, arise from a failure to grasp the purpose of the statements, the process by which they have evolved to their present form, and the limitations from which they necessarily
LIMITATIONS OF FINANCIAL STATEMENTS
First of all, I think we should make it clear that financial statements issued by a company are designed to depict its economic progress—or lack of progress.
Its financial statements should portray its progress in as meaningful a way as the interested parties can devise. These interested parties include
not only management itself, but stockholders, financial analysts, credit grantors, and (in some cases) regulatory authorities as well.
But no matter how skillful a job is done to make statements meaningful,
they will always be subject to misunderstanding and misinterpretation
unless their inherent limitations are recognized.
What are some of these limitations?
The first we might cite is that of the time period covered, which for