Question

1. What are the key components to GAAP? Why is it important that GAAP governs financial reporting?

Answer 1

Generally accepted accounting principles (GAAP) refers to a term that defines the set of rules, standards and practices used throughout the accounting industry for the prepration and standardization of the financial statements by which accounting professionals must abide. In the United States, there are three key components that make up GAAP: the rules, regulations, and guidelines by which accounting industry should abide; the detailed rules and standards behind such guidelines, which are maintained and issued by the Financial Accounting Standards Board (FASB). Thus the key Components of GAAP are APB Opinions, FASB Standards, AICPA Research Bulletins, and other authoritative pronouncements

GAAP is important and governs financial reporting in the following ways:

• Capital markets are dependent on companies that should be able to supply the market with high-quality financial information thus to enable investors to make better decisions.

• When a financial report is prepared in compliance with GAAP then it establishes greater accountability and transparency between a state or local government and its citizens, legislative and oversight bodies, creditors and investors.

• There are numerous private companies, especially who are seeking for the expansion their business and/or considering going public, thus their decision to use GAAP is based financial reporting.

• Not-for-profit financial statements that use GAAP promote understandability from a user perspective, and are generally understood by lenders, rating agencies, accrediting bodies, donors, grantors, and regulators.

• Financial reporting (that sub includes the balance sheets, profit and loss statements, financial notes, and disclosures) is the language that we often use to communicate information regarding the financial condition of a company, a not-for-profit, or a state or local government.

• Making possible equitable and scientific pricing by decreasing prices of goods that use less activity resources and raise the prices of products that consume more of the company activity resources might not be possible without accounting principles.