Inferring Transactions from Financial Statements*

Authors


  • *

    Accepted by Jerry Feltham. We thank Rick Antle, Bill Beaver, Joel Demski, Ron Dye, Jerry Feltham (editor), Karl Hackenbrack, Chuck Horngren, Yuji Ijiri, Richard Lambert, Brian Mittendorf, Paul Newman, Robert Swieringa, Rick Young, David Ziebart, two anonymous referees, and workshop participants at Case Western, Florida, Ohio State, Purdue, and Yale for helpful comments.

Abstract

In this paper, we embed the double entry accounting structure in a simple belief revision (estimation) problem. We ask the following question: Presented with a set of financial statements (and priors), what is the reader's “best guess” of the underlying transactions that generated these statements? Two properties of accounting information facilitate a particularly simple closed form solution to this estimation problem. First, accounting information is the outcome of a linear aggregation process. Second, the aggregation rule is double entry.

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