A statement of receipts and disbursements will give the executive a knowledge of the manner in which the business organization is handling its cash transac tions. A comparison of results with several pre ceding periods will reveal the wisdom with which payments are made, and will indicate whether or not financial difficulties have been encountered at dif ferent times.
9. False false statements the author does not mean only intentionally misleading ones. They may include statements which have been prepared from insufficient records, or from records which do not present a clear view of the actual condi tions of a business.
A misconception of a balance sheet msy result from several different causes, of which the principal ones are : (1) vagueness of the terminology and use of technical words not readily understood by the layman; (2 ) improper accounting records on which the state ment is based; (3) intentional misrepresentation of the management; and (4) improperly prepared state ment.
It may be admitted that technical terminology can not be entirely avoided. Therefore, the layman must make himself acquainted with the meaning of certain technical terms. But when terms of a controversial nature are used, they should be made clear by descrip tions. Certain lines of business will have accounts peculiar to the business, and while the technical phraseology in these instances cannot be entirely avoided, the meaning can be made more intelligible by means of an added description.
That an accounting system can always furnish ab solutely accurate information in all cases, no one would contend. The reader has already been cau tioned that the best that accounting systems can do is to reflect the scientifically prepared estimate of condi tions. This uncertainty appears principally in con nection with the valuation placed on assets. The diffi culties encountered in this particular connection have already been touched upon in previous volumes and will be more fully discussed in this volume later. For the present it is sufficient to say, that where there are no outside criteria and no other means of compari sons with other forms, it is advisable to make a de tailed .
study of each asset before one can pass upon the condition of a business as reflected in a given state ment.
10. Intentional misrepresent tations which are intentional may be accomplished in a number of ways. Quite often they are the result
of a combination of the false with just enough truth to make it seem reasonable. Absolute falsehoods can be detected directly. But the grouping of various ac counts so that the good is put with the bad makes it difficult for any one to pass a correct judgment. No knowledge of accounting principles will disclose this fact under ordinary conditions.
11. Incorrect due to the incorrect grouping of accounts, the omission of pertinent information, and mistakes in inventory preparation or in pricing, will all result in false state ments. Fortunately, however, the form of statement preparation is becoming so well systematized that er rors of this nature will be easily detected. If it is borne in mind that there may be omissions among the various groups shown in any statements, a trained 'observer will easily detect false statements.
A statement that presents too favorable a condi tion should be questioned as closely as one that shows an unfavorable condition. By going back to figures and tracing them to their sources, one may often dis cover the errors.
If the profits of a particular department are un usually large the executive shduld examine the rela tive charges of the various groups of expenses. By comparing the relative percentages of profits in one department with the cost of similar departments, one may be able to pick out the section which has been misstated.
As a case in point, if the manufacturing costs of one firm were found proportionately less than the manu facturing costs of others in the same line, it would in dicate that the cost had been arbitrarily reduced, or that the sales had been fictitiously increased without a corresponding increase being made in expenses. The relation among the various groups of accoUnts will, as a rule, remain fairly constant in all firms engaged in the same line of business. If, therefore, the rela tionship is not the same, it indicates either false state ments or inefficient management. A successful method of detecting such things is to make a compari son of the present period with that of preceding pe riods. As a rule, when a statement is incorrectly pre pared, intentionally or otherwise, it will be obvious to the trained observer, because it is difficult to obtain relative amounts in all accounts.