Describe the purpose of U.S. generally accepted accounting principles (U.S. GAAP) and the benefits that these...

Describe the purpose of U.S. generally accepted accounting principles (U.S. GAAP) and the benefits that these rules provide.

Expert Solution

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Generally accepted accounting principles (GAAP) refer to a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the United States must follow GAAP when their accountants compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP aims to improve the clarity, consistency, and comparability of the communication of financial information.

Purpose of GAAP
The purpose of GAAP is to create a uniform standard for financial reporting. When financial information is made available to the public, it should serve the purpose of helping investors make informed decisions as to where to put their money. Similarly, it should enable lenders to properly assess the financial condition of companies looking to borrow money.

When applied to non-profits and government organizations, the goal of GAAP is to ensure complete transparency on the part of the reporting entities. Information provided under GAAP needs to be not only clear, comprehensive, and easily understood, but verifiable by auditors and other outside parties.

Benefit of GAAP

following are the benefits of GAAP
1. Without GAAP, companies wouldn't be held to a strict set of standards, which means they'd have a lot more leeway in deciding what information they choose to share or keep hidden. GAAP, therefore, serves the very-important function of making sure companies and organizations can't "cheat" on their financial reporting.

2. GAAP allows investors to easily evaluate companies simply by reviewing their financial statements. If an investor is torn between two companies in the same industry, that investor can compare their respective statements to determine which is doing a better job at generating revenue and managing cash flow.

3. GAAP helps taxpayers understand how their tax dollars are being spent.

4. GAAP also helps companies gain key insights into their own practices and performance. Furthermore, GAAP minimizes the risk of erroneous financial reporting by having numerous checks and safeguards in place. The information provided in GAAP-compliant financial statements can therefore generally be regarded as reliable and accurate.

ekkarill92 answered 9 months ago

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