Is it reasonable to examine variations in company earnings over time without making any adjustments?
Explain your response.
Ans.
No, it isn’t acceptable. Accounting standards change throughout time, resulting in different profits being
estimated in different time periods for the same set of transactions and events due to the different
regulations. That is, a shift in profit from one period to the next could simply be due to the use of a new
accounting system.
As a result, any study that looks at how profits have changed over time (perhaps using ‘profits’ as the
dependent variable and attempting to explain how profit has changed as a result of various initiatives or
factors) will need to make some adjustments to account for the effects of changing accounting methods.