Traditional Accounting Compares Apples to Oranges
The way traditional accounting compares the income statement or the similar cash flow for the current year to the balance sheet covering all the years to date cracks me up.
Such reminds me of a football statistician who uses report A, the various ways in which we have scored compared to the various ways they have scored giving the total score us vs them this year (income statement); and also report B showing the all time us vs them score for our legendary ball club's history combined with all the players who have ever played for our team printed in team colors, and all the injuries they have ever suffered on gray background (balance sheet).
Such a setup means: the data for the current year, is different than what I look at for all the years put together--comparison problems--more comparable would be, same stats looked at for this year as for all the years combined.
The traditional data shows 2 different time periods which are not comparable; one is all-time including last year, the other is last year alone. More comparable would be, say, 1980-2005, and 2005-2006.
We want to compare performance A at time 1 to performance A at time 2, because we all know from common sense this is what produces results.
The balance sheet compared to this year's income statement is not especially wise, if what you desire is comparing all time performance to this year's performance.
Rather a balance sheet showing differences between the first year there was a balance sheet, say 1980, and the year 2005 should be created, which shows the total percent change in given assets liabilities and equities from 1980 to 2005 (accounts receivable up 100 percent compared to its 1980 level), and that shows what percentage of the overall change was produced by given assets liabilities and equities (accounts receivable's growth accounted for fifteen percent of the overall 1980-2005 rise in assets).
Another similar balance sheet should be prepared covering the differences in assets liabilities and equities in the two most recent years. The two sheets should be integrated into one one sheet where for example on one row in the table you can find info showing the percentage change in inventory 1980-2005, and also the percentage change from 2005 to 2006.
Likewise similar things could be done using the 1980, 2005, and 2006 income statements.
The traditional accounting reminds me of a legendary college football team harbored in an enormous preppy field house, which likes to compare its honored all-time history over the centuries to its performance this particular year. Yet said the traditional accounting does a mediocre old-fashioned job of statistically presenting the two pictures, one of the all-time performance and the other of this year's performance.
This despite the fact that dozens of good old boys would like nothing better than to put their feet up on the Field House dining hall tables, slosh back a few mugs of ale, and watch videos backed with interesting stats comparing the all-time performance to this year's performance.
@2006 David Virgil Hobbs
Such reminds me of a football statistician who uses report A, the various ways in which we have scored compared to the various ways they have scored giving the total score us vs them this year (income statement); and also report B showing the all time us vs them score for our legendary ball club's history combined with all the players who have ever played for our team printed in team colors, and all the injuries they have ever suffered on gray background (balance sheet).
Such a setup means: the data for the current year, is different than what I look at for all the years put together--comparison problems--more comparable would be, same stats looked at for this year as for all the years combined.
The traditional data shows 2 different time periods which are not comparable; one is all-time including last year, the other is last year alone. More comparable would be, say, 1980-2005, and 2005-2006.
We want to compare performance A at time 1 to performance A at time 2, because we all know from common sense this is what produces results.
The balance sheet compared to this year's income statement is not especially wise, if what you desire is comparing all time performance to this year's performance.
Rather a balance sheet showing differences between the first year there was a balance sheet, say 1980, and the year 2005 should be created, which shows the total percent change in given assets liabilities and equities from 1980 to 2005 (accounts receivable up 100 percent compared to its 1980 level), and that shows what percentage of the overall change was produced by given assets liabilities and equities (accounts receivable's growth accounted for fifteen percent of the overall 1980-2005 rise in assets).
Another similar balance sheet should be prepared covering the differences in assets liabilities and equities in the two most recent years. The two sheets should be integrated into one one sheet where for example on one row in the table you can find info showing the percentage change in inventory 1980-2005, and also the percentage change from 2005 to 2006.
Likewise similar things could be done using the 1980, 2005, and 2006 income statements.
The traditional accounting reminds me of a legendary college football team harbored in an enormous preppy field house, which likes to compare its honored all-time history over the centuries to its performance this particular year. Yet said the traditional accounting does a mediocre old-fashioned job of statistically presenting the two pictures, one of the all-time performance and the other of this year's performance.
This despite the fact that dozens of good old boys would like nothing better than to put their feet up on the Field House dining hall tables, slosh back a few mugs of ale, and watch videos backed with interesting stats comparing the all-time performance to this year's performance.
@2006 David Virgil Hobbs
posted by David Virgil at 10:47 PM
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