Sprouse’s What-You-May-Call-Its: Fundamental Insight or Monumental Mistake?
27 Pages Posted: 3 Apr 2010
Date Written: March 31, 2010
We critically evaluate Sprouse (1966 Journal of Accountancy), which prodded FASB towards a balance sheet approach. We highlight 3 errors in this article. First, Sprouse confuses necessary and sufficient conditions by arguing that good accounting systems must satisfy the balance sheet equation. Second, Sprouse’s claim that financial analysts rely on balance sheet analysis is contradicted by contemporary and current security analysis textbooks, analysts’ written reports, and interviews with analysts. Third, and most crucially, Sprouse does not recognize that the primary role of accounting systems is to help managers discover and exploit profitable exchange opportunities, failing which firms cannot survive.
JEL Classification: M44
Suggested Citation: Suggested Citation