Considering changes in accounting policies

How a company puts together its numbers is just as critical as the numbers themselves. The accounting policies adopted by the company drive these numbers. Whenever a firm indicates in the notes to the financial statements that it's changing accounting policies, your red flag should go up. I discuss the key accounting policies and how they can impact income in the section "Accounting Policies Note: Laying Out the Rules of the Road," earlier in this chapter. You can find more details about accounting policies in Chapter 4.

Changes in accounting policies aren't always a sign of a problem. In fact, many times the change is related to requirements specified by the Financial Accounting Standards Board (FASB) or the SEC. No matter what the reason for the change, be sure you understand how that change impacts your ability to compare year-to-year or quarter-to-quarter results.

If you see a change in accounting methods but you don't see an indication that the FASB or SEC required it, dig deeper into the reasons for the change and find out how the change impacts the valuation of assets and liabilities or the company's net income. You can find some explanation in the accounting policies note, but if you don't understand the explanation there, call the investor relations department and ask questions.

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