To facilitate comparisons across companies (cross sectional analysis) and over time for a single company (time series analysis), it is important that accounting methods are comparable and consistently applied. However, accounting standards must be flexible enough to recognize that differences exist in the underlying economics between businesses.

Suppose two companies buy the same model of machinery to be used in their respective businesses. Th e machine is expected to last for several years. Financial reporting standards typically require that both companies account for this equipment by initially recording the cost of the machinery as an asset. Without such a standard, the companies could report the purchase of the equipment differently. For example, one company might record the purchase as an asset and the other might record the purchase as an expense. An accounting standard ensures that both companies should record the transaction in a similar manner.

Accounting standards typically require the cost of the machine to be apportioned over the estimated useful life of an asset as an expense called depreciation. Because the two companies may be operating the machinery differently, financial reporting standards must retain some flexibility. One company might operate the machinery only a few days per week, whereas the other company operates the equipment continuously throughout the week. Given the difference in usage, it would not be appropriate to require the two companies to report an identical amount of depreciation expense each period. Financial reporting standards must allow for some discretion such that management can match their financial reporting choices to the underlying economics of their business while ensuring that similar transactions are recorded in a similar manner between companies.

Financial statements of two companies with identical transactions in the fiscal year, prepared in accordance with the same set of financial reporting standards, are most likely to be:

A. identical.

B. consistent.

C. comparable.