Financial Statements
Financial accounting information has universally
been branded as exhibiting rigid exactness. In fact, accountants are often referred to as “bean counters” because
of their perceived need to count every bean in the bowl to arrive at obsessively accurate numbers. Here, though,
the assertion is made that accounting information is not a precise picture but merely a fair representation of an
organization’s financial health and prospects. How correct or exact is the financial information that is reported
by a business or other organization?
Answer: In accounting, materiality has long been the underlying benchmark in the reporting of information. This
concept requires that data presented by an organization to decision makers should never contain any material
misstatements. For financial accounting information, this is the basic standard for the required level of accuracy.
Decision makers want financial statements—such as those prepared by Starbucks or Intel—to contain no material
misstatements. Because of their central role in this reporting process, understanding the terms “misstatement” and
“material” is essential for any student seeking to understand financial accounting.
A misstatement is an error (made accidentally) or fraud (done intentionally) where reported figures or words
actually differ from the underlying reality. For example, a company official could erroneously record a $100,000
expenditure that was made to acquire a new building as actually pertaining to the purchase of land. Consequently,
the building’s cost might be reported as $2.3 million when it was actually $2.4 million. This financial information
is misstated.
