Jamesian Philosophy Refreshed

The other central document of accounting is an income statement.   This represents a period of time, rather than the moment-in-time of the balance sheet. If all is working properly, the income statement should give investors an idea of the underlying processes that have made the present condition of the company what it is.   We won’t spend a lot of time on the income statement, simply because much of what we might say about it we’ve already said. The issues that arise in compiling an income statement look familiar to anyone who understands the latest balance sheet.   For example, the expenses part of an income statement should indicate the costs of goods sold (COGS), that is, the costs directly attributable to such of the goods that have gone out the door in the hands of a customer over the past year or quarter, separately from all the other costs, especially the “general and administrative expenses.” The issues that arise when valuing COGS are the same is...

Entities large enough to hire accountants tend to keep a different set of books for each of three purposes: 1) Dealing with the tax authorities, 2) Communicating with their own investors and creditors, and 3) Allowing their managers to engage in informed internal deliberations about mergers, spin-offs, prices, wages, and so forth. That is to say, there are three sorts of accounting: tax, financial, managerial. The two sets of books that are designed for external communication, the tax and financial accounting books have a fascinating off-setting feature. The normal temptation in financial accounting will be to overstate revenue, and the normal temptation in tax accounting will be to understate it.   If you are a potential investor, and if you suspect the books they’re showing you are a bit too rosy, you’ll want to see the books they show the tax authorities. At any rate, in what follows we will chiefly discuss financial accounting. There is a good deal of drama ...