Paper Example on United States GAAP

Introduction

With the increased globalization in the business world, there has been a need to develop high quality and globally accepted financial reporting system. Such an arrangement provides investors with transparent, reliable and comparable information, both at the domestic and international level, to ensure efficient and fair capital markets (White, 2017). Financial reporting generally communicates companies' financial positions and operational results which are prepared using the generally accepted accounting principles. Accounting principles are, mainly based on universally accepted standards, concepts, and objectives that guide the preparation and presentation of financial information. A business which releases their financial report to the public is required by the law to follow GAAP guidelines. This paper discuses the U.S Generally accepted accounting principles and how users of accounting information are protected by these guidelines.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

Generally accepted accounting principles (GAAP) form a combination of rules and policies that cover the legalities complexities and details of corporate accounting. These principles include specific regulations on the disclosure concerning the company's finances, the value of assets, prudence, periodicity, and revenues (Flood, 2012). GAAP mainly incorporates ten fundamental concepts which include: the principle of consistency, regularity, utmost good faith, materiality, periodicity Continuity, prudence, non-compensation, the permanence of methods and sincerity. Organizations use GAAP accounting standards to compile a record and report accounting information. GAAP places all companies on an equal playing field improves clarity on how financial information is communicated and also ensures that any information provided is reliable, comparable relevant and consistent; thus giving investors a minimum consistency level on the financial statements used while analyzing the best investment opportunities (White,2017).

GAAP specifications emphasize on principle and concept definition as well as specific rules that govern the industry. According to (Smith, 2012) the standards and specifics of GAAP vary in different sectors and geographic locations; in the United States, for example, Financial Accounting Standards Board (FASB), is tasked with the responsibility of setting accounting standards which must be recognized by the Securities and Exchange Commission (SEC) and American Institute of Certified Public Accountants (AICPA). FASB acts as private and a non-profit body whose mission includes the establishment and improvement accounting standards to provide useful information to the end users of financial reports. This mission, according to White (2017) is achieved using an independent and open procedure which encourages the participation of all stakeholders and analyses their views.

FASB stays within its objectives by enhancing the importance of financial reporting and financial information and improving the characteristics of essential details, verifiability, understandability, and comparability. The body also achieves its mission by ensuring the set standards still reflect changes in the economic environment, providing the relevant education to users of financial statements and identifying any insufficiencies that might exist in financial reporting that can be possibly improved through the setting of standards. All publicly trading companies are required by the Securities and Exchange Commission to use the FASB standards while providing complete financial reports on a quarterly basis (Barth, Landsman, Lang, & Williams, 2012). The two bodies work together to ensure their financial transparency and those investors receive clear and consistent information on the companies they invest in.

GAAP guidelines mainly apply to financial accounting, which primarily focuses on historical financial information. Unlike managerial accounting which concentrates only on internal users, financial accounting must follow this set of accounting rules to ensure consistency while reporting financial information. The primary purpose of GAAP is to ensure that companies, investors, lenders and other stakeholders are protected from questionable accounting practices. Compliance with GAAP rules provides a transparent reporting system while at the same time, standardizing assumptions, methods, definitions, and terminologies. Users of accounting information are, therefore, interested in these rules. Companies, for instance, are given a channel to provide the required financial information to government regulatory bodies and concerned shareholders; the guidelines, therefore, play a significant role when it comes to safeguarding shareholders' rights and investments (White, 2017).

Additionally, GAAP standards enable companies to maintain accurate accounting control that assists in consistently providing quality accounting information. The Consistency allows for company executives to review financial statements, identify areas which need improvement and to come up with strategic plans for the future. Managers, for example, are able to check employee performance if the accountants use consistent principles. Lenders and investors, on the other hand, use financial reports based on GAAP to decide on the criteria of capital allocation and to also ensure efficient operations in the financial markets. Also, through GAAP standards investors can compare financial information from compliant companies and confidently assume consistency thus enabling an accurate (Barth, Landsman, Lang, & Williams, 2012. For instance, if an individual wants to invest in a real estate industry, they first compare profit figures between different companies, which are only possible if the figures were prepared using similar principles.

GAAP also allows government agencies to analyze a company's ability to provide employment, pay taxes, trade fairly and if the financial information given to investors is reliable. The IRS also relies upon financial reports prepared using GAAP standards to assess the company's income and expenses reports. Besides the government, employees also use financial statements prepared through GAAP guidelines to determine the company's ability to pay well and if they can get a stable source of income. Auditors, on the other hand, use the standardized instructions provided by GAAP to draw realistic conclusions regarding the company's performance since the accounting principles used are similar to those of the competitors. If GAAP guidelines are not fully applied, then a company's profits cannot be compared with others showing low returns due to the difference in the method used for revenue-recognition. Although GAAP principles are aimed at ensuring that financial statements are transparent, it is not a guarantee that the reports do not have errors that might mislead the investors. Therefore, the companies using GAAP guidelines should always scrutinize their financial statements.

Conclusion

In conclusion, the goal of GAAP, when applied to government and non-profit organizations, is to ensure that reporting entities maintain transparency at all times. The information provided by companies should be not only be easy to understand, comprehensive and transparent, but also easily verifiable by auditors. The companies report financial details by providing transaction information; using similar protocol and reporting procedures periodically and enforce the company's regulations to maintain their standards. The Financial Accounting Standards Board (FASB) creates these principles and ensures that companies apply them while reporting their financial information. Adhering to these principles assist companies in achieving business objectives by using proper economic data, accessing essential financial records and ensuring consistency in complying with tax regulations. Generally, although GAAP concepts can be interpreted in different ways, the principles are used as a foundation for drafting and reporting financial documents.

References

Barth, M. E., Landsman, W. R., Lang, M., & Williams, C. (2012). Are IFRS-based and US GAAP-based accounting amounts comparable?. Journal of Accounting and Economics, 54(1), 68-93.

Flood, J. M. (2012). Wiley GAAP 2013: Interpretation and application of generally accepted accounting principles. John Wiley & Sons.L Murphy Smith DBA, C. P. A. (2012). IFRS and US GAAP: Some key differences accountants should know. Management accounting quarterly, 14(1), 19.

White, M. J. (2017, January 5). A U.S. Imperative: High-Quality, Globally Accepted Accounting Standards. Retrieved June 22, 2018, from U.S Securities and Exchange Commission: https://www.sec.gov/news/statement/white-2016-01-05.html (White, 2017)