Accounting principles, methods, and policies can incluence the
quality of a company's reported earnings.
Such factors should be considered when evaluating the financial
statements of companies. Generally,
accounting principles, methods, and policies that result in the slowest
reporting of income are considered the most conservative.
When a firm has conservative accounting procedures, its earnings
are of high quality.
A company's accounting
policies should be compared with industry standards.
If the policies are more liberal, earnings quality is generally
considered to be lower. Consider
the following generalities when evaluating the quality of a company's
1. A low price/earnings ratio (market price per share divided by earnings per
An understanding of nature and scope of generally accepted accounting principles will help in evaluating a firm's accounting policies. Major accounting principles and policies are disclosed within the financial statements and presented in the notes to the financial statements. Notes are considered an integral part of financial statements. Many accounting policies used in financial statements are disclosed in a Summary of Accounting Policies, which immediately precedes the first note or is the first note to the statements.