Accounting Procedures

The second major cause of distortions in the picture presented by financial statements and ratio analysis of the items in the statements is the different accounting procedures that may be used in arriving at the figures presented in the income statement and balance sheet.

Although accountants apply generally accepted accounting principles, there is room for variation among different businesses (and among different accountants) in the application of GAAP.

Consistency generally is required within a particular business. However, different policies in different businesses can affect their reported results and distort the picture of where your business stands in relation to other businesses.

In this regard, consider that:

For all these reasons, when you're comparing your financial statements to industry standards or to those of another business, take the results with a grain of salt.