More Than a Numbers Game A Brief History of Accounting Thomas A. King John Wiley & Sons, Inc. ffirs.qxd 7/20/06 1:40 PM Page iii ffirs.qxd 7/20/06 1:40 PM Page ii More Than a Numbers Game ffirs.qxd 7/20/06 1:40 PM Page i ffirs.qxd 7/20/06 1:40 PM Page ii More Than a Numbers Game A Brief History of Accounting Thomas A. King John Wiley & Sons, Inc. ffirs.qxd 7/20/06 1:40 PM Page iii Copyright © 2006 by Thomas A. King. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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HF5616.U5K53 2006 657.0973—dc22 2005037200 Printed in the United States of America. 10987654321 ffirs.qxd 7/20/06 1:40 PM Page iv To Yvonne, Amanda, Alex, and Emily ffirs.qxd 7/20/06 1:40 PM Page v ffirs.qxd 7/20/06 1:40 PM Page vi CONTENTS About the Cover ix Preface xi 1 Double-Entry 1 2 Railroads 13 3 Taxes 23 4 Costs 41 5 Disclosure 55 6 Standards 71 7 Science 89 8 Inflation 103 9 Volatility 115 10 Intangibles 131 11 Debt 145 vii ftoc.qxd 7/20/06 1:42 PM Page vii 12 Options 159 13 Earnings 171 14 SOX 187 15 Epilogue 207 Notes 213 Bibliography 223 Index 235 About the Author 242 viii CONTENTS ftoc.qxd 7/20/06 1:42 PM Page viii [...]... Falloon, Pamela van Giessen, and Laura Walsh coached me with patience as I learned about the world of publishing Their copyeditors possess a deft touch Thanks also to my father, who encouraged an accounting career I hated my first job but slowly learned to appreciate accounting s hidden beauty My grandfather exposed me to the craft of history and taught there are only three ways to know something: you experience... certainty Any veteran of garage sales recognizes the range of opinion associated with asset values Accountants turned to historical cost, the cash used to buy the asset, as a solution This sum represents what a willing buyer and seller agreed upon in an actual transaction Auditors could verify this balance easily Valuation of financial instruments, whose prices could be easily observed in security markets,... manager, my boss’ boss, shared in a raspy voice that we had an accounting crisis Accounting crisis? Jumbo shrimp, gunboat diplomacy, gourmet pizza, and other snappy phrases came to mind Hey, let’s book another entry The manager had learned that a client had amassed a sizable bond position and sustained adverse interest rate changes Financial statements recently filed with the Securities and Exchange Commission... The resulting lack of conformance, especially with tax accounting and the rise of pro forma earnings figures, validated a Rashomon-like belief that there was no negative consequence for reporting the same event in varied ways Second, the growth of services aggregating analyst earnings estimates led to a game where analysts and investors evaluated the quality of a firm’s reported results by determining... spectacular meltdown sparked the following effort to chronicle American corporate accounting s history from the age of railroads to Sarbanes-Oxley legislation History tells a story, and no story can ever be complete Historians must select from an infinite ocean of facts those few deemed significant Selections become fact only by virtue of significance attached by authors.1 These pages present my views of. .. potential collateral and existence of other claims Shareholders care about a corporation’s ability to pay future dividends through growth and improved margins Whereas balance sheets supported creditor evaluation of management ccc_king_001-012_ch01.qxd 10 5/31/06 1:51 PM Page 10 MORE THAN A NUMBERS GAME Table 1.1 Income Statement Characterizes Changes in Retained Earnings Retained earnings, beginning of accounting. .. especially when management controls the proxy process for soliciting shareholder votes Management abuses can easily arise from institutional separation of management from ownership: A notable example was RJR Nabisco’s extravagant 1980s spending on a corporate aircraft fleet Investors and creditors fashioned contracts from financial accounting balances in attempts to align employee interests Compensation... the beginning of the twentieth century, some managers began to use depreciation to smooth reported earnings A 1912 Journal of Accountancy editorial complained that depreciation had become a tool used by management to counter fluctuations in profits Good years had been made to bear heavy charges Bad years bore no provision or an inadequate one.17 ➣ By the late nineteenth century many farmers came to resent... establish a U.S of ce, certified financial statements of the New York, Ontario, and Western Railway Company, the first American railroad to be audited.12 In contrast to contemporary practice, early creditors paid auditors directly Two prominent auditors learned their trade as railroad bookkeepers Charles Waldo Haskins (born 1852) worked as an accountant in the North River Construction Company, engaged to build... to explain the how’s of accounting Readers consequently learn the mechanics of, say, calculating earnings per share without understanding that statement preparers and users often work at crosspurposes to cope with nonrecurring items and costs of equity-based compensation This short book’s contribution is to discuss the major why’s of accounting practice More Than a Numbers Game was inspired by Arthur . www.wiley.com. Library of Congress Cataloging-in-Publication Data: King, Thomas A. , 1960– More than a numbers game : a brief history of accounting / Thomas A. King. p. cm. Includes bibliographical references and. specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice. More Than a Numbers Game A Brief History of Accounting Thomas A. King John Wiley & Sons, Inc. ffirs.qxd 7/20/06 1:40 PM Page iii ffirs.qxd 7/20/06 1:40 PM Page ii More Than a Numbers Game ffirs.qxd