Identify the reporting choices and biases that make companies' financial statements less reliable and harder to compare, and explain how such biases can sway financial decisions

Accounting standards leave room for choices, and choices shape comparisons. Inventory cost flow (FIFO, weighted average, or LIFO under US GAAP only), depreciation methods and lives, whether development costs meet the IFRS criteria for capitalisation, revenue recognition judgements, goodwill impairment assumptions, pension assumptions and lease or consolidation choices all change reported profit, assets and ratios. Management can bias these choices towards meeting targets, smoothing earnings or protecting covenants. Unadjusted comparisons can then mislead a buyer paying a multiple, a lender setting terms or a board setting pay. The analyst should identify each choice, estimate its effect and decide whether it reflects economics or bias. The trap is comparing reported ratios across companies that made different choices.