Why Use Accrual Accounting?
Accrual accounting presents a more accurate depiction of a company’s operations. In the case of Boeing (Exercise 2), its recognition of $330 million of revenues will likely take place at regular intervals, in step with the completion of airplane production and delivery.
Accrual accounting attempts to present a more accurate depiction of a company’s operating performance by matching costs with revenues. For the purposes of financial analysis, the matching principle facilitates making projections of future results.
What If the Accrual Concept Were Not Used?In the Boeing example (Exercise 2), Boeing presumably had to purchase raw materials (e.g., metal, plane parts, etc.) some time ago, before any revenues from its contract with Bavaria Leasing were recognized. If it did not match revenues with expenses, it would have reported the material costs back when they were acquired on their financial statements. The financials would show a company with high costs and no revenues. This, of course, would not be an accurate depiction of the company’s profitability because we know that Boeing bought those raw materials for the purpose of fulfilling an order that will generate future revenues. By matching costs with revenues, the accrual concept strives to more accurately depict a company’s operating results. |