Sprouse's What-You-May-Call-It: Fundamental Insight or Monumental Mistake?
Accounting Historians Journal, Vol. 37, No. 1, pp. 121-148, June 2010
Posted: 26 Jul 2010
Date Written: June 1, 2010
We critically evaluate Sprouse’s 1966 Journal of Accountancy article, which prodded the FASB towards a balance-sheet approach. We highlight three 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 insinuation 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, without which firms cannot survive.
Keywords: Accounting principles, conceptual framework
JEL Classification: B25, M41, N22
Suggested Citation: Suggested Citation