Why is it permissible to violate generally accepted accounting principles when preparing reports used strictly by...

Why is it permissible to violate generally accepted accounting principles when preparing reports used strictly by company management?

Expert Solution

The generally accepted accounting principles (GAAP) are standard rules or guidelines to be used for the purpose of accounting and financial reporting. The GAAP are adopted and mandated by the U.S. Securities and Exchange Commission (SEC) for certain companies in order to bring about uniformity, consistency, and transparency in the accounting and financial reporting between various organizations. The GAAP are thus required to be adhered to by organizations for the purpose of their external financial reporting in order to enable the various stakeholders of organizations, such as the investors, creditors, lenders, regulatory authorities, etc. to analyse the financial statements of various organizations in a more meaningful manner.

For managements of organizations, data may need to be presented and analyzed in a different manner than that mandated by the GAAP, for various purposes such as budgeting, decision making, internal control, etc. It is hence permissible to violate the GAAP for preparing such reports as they are meant solely for internal use and not for external reporting.

ekkarill92 answered 1 year ago

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