American v. Japanese Accounting

Accounting has been described as the "language of business" (Guerrieri, Haber, Hoyt & Turner, 1992, p. 1). Accounting provides managers with the tools they need to plan effective and focus attention on deviations from that plan, direct daytoday operations and arrive at the best solution to the operating problems faced by the organization. However, as the language of business, accounting is also used by those outside the organization to make decisions that directly affect the company. If the company is publicly held, this information is used by current and potential shareholders to determine whether management is meeting their expectations. Creditors evaluate the company's financial statements in order to determine whether or not to extend credit or to call in debt already owed. Potential employees evaluate the financial condition of the company to determine if they are attracted to the organization, and current employees may base their long-term employment plans on this same financial information.

So-called "American" companies (those with headquarters within the United States and those traded on American stock exchanges) recognize the need for consistent accounting standards and have developed those standards and principles. While much of the rest of the world has gradually adopted many American accounting principles, there remain significant differences between American accounting principles and those of other nations. In this increasingly global mar

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meet its cash needs. A company may have soaring revenue and be highly profitable, but if it does not have a strong cash flow, it could find itself in trouble (and may need to improve its collection procedures, or extend less trade credit as a result). Inexperienced managers may also assume that some items on the balance sheet (such as depreciation) represent a source of cash when, however, they do not. Thus the statement of cash flow can help identify problems before they become unmanageable (Siropolis, 1994, p. 347). Each of these financial statements is prepared using information provided by the company. Because of American accounting standards, companies must remain consistent to the rules that they themselves choose to set up. Thus a company which decides to use an accrual method of accounting (recognizing revenue and liability at the time of transaction rather than at the time of payment) must do so for all of its transactions; it cannot use the cash basis for some items and accrual for others. Similarly, once a company chooses a method of inventory valuation (such as first-in-first-out), it must have good reason for changing to a different system. However, American accounting principles do not require that all compa

Category: Economics - A