Accounting Theory

Summary of significant accounting policies

As part of their annual reports, companies include summaries of significant accounting policies. These policies assist users in interpreting the financial statements. To a large extent, accounting theory determines the nature of these policies. Companies must follow generally accepted accounting principles in preparing their financial statements.

The accounting policies of The Walt Disney Company, one of the world's leading entertainment companies, as contained in a recent annual report follow. After each, the chapter of this text where we discuss that particular policy is in parentheses. While a few of the items have already been covered, the remainder offer a preview of the concepts explained in later chapters.

An ethical perspective: Maplehurst company

Maplehurst Company manufactures large spinning machines for the textile industry. The company had purchased USD 100,000 of small hand tools to use in its business. The company's accountant recorded the tools in an asset account and was going to write them off over 20 years. Management wanted to write these tools off as an expense of this year because revenues this year had been abnormally high and were expected to be lower in the future. Management's goal was to smooth out income rather than showing sharp increases and decreases. When told by the accountant that USD 100,000 was a material item that must be accounted for in a theoretically correct manner, management decided to consider the tools as consisting of 10 groups, each having a cost of USD 10,000. Since amounts under USD 20,000 are considered immaterial for this company, all of the tools could then be charged to expense this year. The accountant is concerned about this treatment. She doubts that she could successfully defend management's position if the auditors challenge the expensing of these items