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In this study, we examine whether a company's choice of income statement format is associated with the company's industry-specific and company-specific accounting characteristics. This study uses a unique data set of 8353 US companies that is constructed by combining the Compustat North America database with the extractions from the 10-K filings from the EDGAR database of the United States Security and Exchange Commission. Our results support our hypotheses that a company's choice of income statement format is associated with the company's Standard Industrial Classification Code (SIC) and several other accounting characteristics ascribed to financial ratios. Our finding suggests that the flexibility in selecting financial statement presentation formats allows companies to better disclose their industry-wide characteristics and thus facilitates better disclosure. Our finding also implies that such flexibility should be integrated into standards and tools for electronic financial reporting like XBRL.
Introduction
Bovee et al. (2002) and Cong et al (2001) identified the lack of comparability of the diversified structures of financial statements in the first version of extensible Business Reporting Language GAAP Commercial and Industrial Taxonomy (XBRL 2000). In 2002, the first major revision of the XBRL-GAAP Commercial and Industrial Taxonomy (XBRL 2002) was published. XBRL (2002) dropped the rigid structures used in XBRL (2000) and addressed the comparability issue by granting the users the discretion to define their own financial statement structures in link spaces (see XBRL 2002). This dramatic shift invites an investigation of the ever-going debates over comparabiliry-vs.-flexibility in accounting (Wolk et al. 2000) from the perspective of presentation format of financial statement. Specifically, presentation format in this context refers to the classification and aggregation of the line items and the use of strike balances in financial statements.
This study examines the association between the presentation formats of income statement and firms' industry-wide characteristics to pursue evidences that may support the preference to flexibility over comparability or vice versa. The presentation format of income statement is chosen because its diversification is allowed by US GAAP and stuthed by both academic researchers and practitioners. The industry-wide characteristics of firms are used to proximate the information contents that are carried by the presentation formats.
In literature, the presentation format is usually studies from the perspective of classification and aggregation of accounting numbers....