Why are the amounts on the financial statements rounded to thousands or millions?
Amounts on financial statements are often rounded in order to emphasize the important digits. As a result of rounding, the financial statements are more attractive in appearance which in turn makes them more inviting to read.
Rounding is important because corporations must present three years of figures on their income statements and cash flow statements and two years of figures on the balance sheet. For example, imagine looking at the income statement with the following sales amounts over the past three years: $1,512,989.63 $1,321,026.98 $1,265,876.22. Now look at the amounts rounded to the nearest thousand: $1,513 $1,321 $1,266. The rounded figures allow you to focus on the relevant digits. The rounded amounts also makes it easier for us to see the trend. Of course, you must label the financial statement with words such as “Amounts rounded to 000′s” so that the reader understands the amounts shown.
Rounding of the less important digits is acceptable because of accountants’ materiality principle or guideline. The rounding is acceptable so long as the rounded amounts will not mislead a current or potential investor, lender, or other person making a decision from the reported information.
Learn more about Accounting Principles.
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