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Financial Statements are like Processed Food

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I once had a professor explain to me that financial statements are like processed food. The food manufacturing process allows for so many parts per million of insects, chemicals, bacteria, etc. As long as the contaminants are kept to a low level the food is considered acceptable for consumption. The same goes for financial statements. The regulators allow for so many errors or omissions as long as they fall below a material level. This helps balance the requirements for accountants so that they don't spend too much money on controls that might far outweigh the benefit. However at the same time the financial statement user is given comfort that the financial statements are reasonably acceptable.

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This solution gives an opinion and insight regarding the professor's first statement, that "Financial statements are like Processed Food."

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This statement shows us the pros and cons of how regulations interact directly in the accounting field. As stated above, omissions and errors can (and do) occur in the financial statements, as the error will be judged by how material the error or omission is, to the financial statements. Let's say we have a company that has revenue in excess of $5 million. If we have a balance sheet account that is around $2,000, this account is not material ...

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