Who can be harmed when a company changes its accounting methods too often?
Jan Nab is the sole owner of Deer Park, a public camping ground near the Lake Mead National Recreation Area. Jan has compiled the following financial information as of December 31, 2010.
Revenues during 2010—camping fees $140,000 Market value of equipment $140,000
Revenues during 2010—general store 50,000 Notes payable 60,000
Accounts payable 11,000 Expenses during 2010 150,000
Cash on hand 23,000 Supplies on hand 2,500
Original cost of equipment 105,500
Instructions
When a company changes its accounting methods too often, there are several parties that can potentially be harmed:
1. Investors: Investors rely on accurate and consistent financial information to make informed decisions. Frequent changes in accounting methods can make it difficult for investors to assess the financial health and performance of a company, leading to uncertainty and potential misinterpretation of financial statements.
2. Creditors: Lenders and creditors use financial statements to evaluate a company's creditworthiness and determine the terms of lending. Rapid changes in accounting methods can affect the financial ratios and indicators that lenders consider, making it harder for creditors to properly assess a company's ability to repay its debts.
3. Employees: Employees may be indirectly affected if frequent accounting method changes impact the financial stability of a company. Unstable financials may lead to uncertainty about job security, potential layoffs, or even affect the overall financial health and stability of the company, risking employee benefits or job opportunities.
4. Regulatory Authorities: Companies must comply with accounting standards and regulations set by regulatory bodies such as the Financial Accounting Standards Board (FASB) in the United States or the International Financial Reporting Standards (IFRS) globally. Frequent accounting method changes might raise concerns about compliance and result in increased scrutiny by regulators.
How to verify the answer: To find information about the potential harm caused by frequent changes in accounting methods, you can refer to reputable sources such as financial news websites, reports from auditing firms, or academic papers on accounting practices and their impact on stakeholders.