![]() ![]() ![]() Financial statements, including balance sheets, income statements, and cash flow statements compiled using GAAP, can represent the accurate economic picture of a company.ĥ. GAAP, introduced by the Financial Accounting Standards Board (FASB), provides standards applicable to every corporate organization to generate comparable, transparent, and fair information.Ĥ. GAAP is helpful for simplified reporting of a company’s financial information, providing better understandability and improved clarity for all the associated parties.ģ. There are various beneficiaries and users of the financial statements presented by a company other than the management itself, like shareholders and investors, governments or taxation departments, customers and suppliers, etc.Ģ. Anyone who make an invest on a company based on non-GAAP reports might as well be playing slots in Vegas.Need for Generally Accepted Accounting Principles (GAAP)ġ. For some insane reason non-GAAP reports are allowed alongside the GAAP compliant report, like to encourage investment by the clueless. Securities and Exchange Commission (SEC) in order to remain publicly listed on the stock exchanges. It has 10 general Principles:īecause of this GAAP compliant reports are required by the U.S. GAAP's goal is to improve the clarity, consistency, and comparability of the communication of financial information. In the U.S., Generally Accepted Accounting Principles (GAAP) is the common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Yes they can make recommendations but those recommendations are dependent on what the owner wants. Furthermore how the business owner uses those reports is often outside of the accountant's control. Often accountants get the blame when a business does something for short term gains (laying a load of people off or raising a good's price for example) but in reality their reports are only as good as the information they are given. Things are so screwed up that what actually makes a profit and what doesn't is, many times, obscured to the point that no one really knows what the sam hill is going on.Īccounting's goal is to provide information which can be used to keeps a business profitable but in of itself it is a tool and like all tools it can be used or misused. One example of the type of insanity this produces is seen in Return of the Jedi the film cost $32.5 million and made $475 million at the box office.yet according to Lucasfilm the film "has never gone into profit" Harry Potter and the Order of the Phoenix, is even worse as it is claimed it has a lost of $167 million despite taking in $938 million in revenue. However, there is creative accounting beyond even what Enron and WorldCom did this little gem is known as Hollywood Accounting. ![]() Misrepresenting credit sales channel stuffing (sending a host of unordered goods at the end of the quarter and recording them as credit), recording nonrecurring expenses on a regular basis, and misuse of depreciation are all ways the books can be cooked. Enron and WorldCom have become poster children of what is informally called creative accounting, but other ways to cook the books aren't so obvious. Cooking the books is basically manipulation of accounting records toward making the records appear better then they actually are. Keeping two sets of books (one for internal use and one for the outside world) is the bottom of the barrel. These goals can conflict, however, when assets (such as real estate) actually appreciate in value over time, despite providing huge depreciation write-offs to their owners.Ĭooking the books is near the bottom of the barrel in accounting circles. The purpose of depreciation is twofold: it is meant to show assets' decline in value over time, and also to properly match the expense associated with the purchase of an asset to the revenue the asset helps produce over time. To oversimplify, depreciation represents the wear and tear of physical assets such as buildings or vehicles. Few things last forever - enter depreciation. ![]()
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