I use extreme examples to illustrate a point. What if I was a shipbuilder producing just one ship and that ship took five years to build. If simple cash accounting was used as we would with a household budget then for four years the company would appear to be going out of business with horrendous bottom line losses. No revenue and heavy expenses. Then in year five an incredible turnaround as the ship is sold for cash and revenue beats expenses in year five by a ratio of 6:1.
Accrual accounting has its place to smooth out transactions and give a meaningful picture of economic value produced year on year.
As you rightly say Fish, it is important to understand the business before attempting to interpret accounts. Due to the nature of accrual accounting it is open to errors whether intentional or not. Auditors can only pass opinion on whether a report is reasonable based on GAAP.
Rear view mirror tells us how accurate accruals where and potentially whether they were ethical at the time.
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