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Accounting, Critical

Critical accounting involves the application of financial analysis in contexts that are especially vulnerable to the selective reporting of favorable information. To use critical accounting, an organization must have a critical accounting policy (CAP), which dictates how subjective information will be interpreted. The goal is for the CAP to define a method that is consistent, is accurate, and gives the most useful “big picture” view of the place in the market the business occupies, rather than present information in a way that pleases the intended audience but that may not give them a realistic idea of the organization’s future prospects.

Pitfalls

Critical accounting has the goal of avoiding the dangers that accompany what is variously referred to as smoothing or slush fund accounting. Both terms refer to ...

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