Question

Describe one type of company that is required to prepare financial statements that comply with generally accepted accounting practice.

Answer 1

(Q) Describe one type of company that is required to prepare financial statements that comply with generally accepted accounting practice.

(Ans) Accountants use generally accepted accounting principles (GAAP) to guide them in recording and reporting financial information. GAAP comprises a broad set of principles that have been developed by the accounting profession and the Securities and Exchange Commission (SEC) . In the U.S., it has been established by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA). It is used by businesses to organize and summarize the financial information into accounting records.

Governed by FASB, only publicly traded companies are required to comply with GAAP because they were created with investors in mind. Private companies are not required to comply with GAAP, and this will not change once the new guidance is issued. Some private companies follow GAAP because they plan to go public in the future; others are asked to produce GAAP statements for banking, real estate, or purchase or acquisition needs because it is the easiest way to compare companies. And they find it costly and arduous to do so.Not all businesses are required to follow GAAP. You must follow the established accounting standards if your stock is publicly traded or you provide financial statements to people outside of your business, like investors. The U.S. Securities and Exchange Commission (SEC) requires publicly traded companies to follow GAAP in addition to other SEC rules. If you are preparing financial statements to secure outside funding, you must follow generally accepted accounting principles. Otherwise, investors might not trust your financial statements. Small, private companies are generally not required to use GAAP because many of the rules do not apply. And, GAAP requires that you use accrual accounting. Businesses that use cash-basis accounting will find that the GAAP accrual accounting rules are not relevant. But if you need to use GAAP down the line, you will need to switch to accrual.