RSM332H1 Chapter Notes - Chapter 4: Gross Margin, Capital Intensity, Fixed Asset
Document Summary
Consistent financial analysis across companies, industries and countries is important. Analysts must understand the challenges to comparability and attempt to ascertain the financial health of the organizations they study, understanding the limitations inherent in financial accounting practice. Once a firm chooses an acceptable accounting treatment for revenue recognition, capitalization of expenses, inventory valuation, etc. , then the firm must use these same provisions year after year. Any change in accounting principles must be noted in the notes to the financial statements and prior years restated to ensure there is a common basis of comparison to the present. Therefore, internal comparisons, year-over-year, are possible and supported by gaap. Making comparisons between companies, even in the same industry, is much more difficult than comparing the same company to itself over time because: There is a potentially wide divergence in accounting treatment results under gaap. Historical, cost-based accounting can seriously affect efficiency, leverage and profitability ratios.
