Question

Discuss pros and cons of current GAAP for balance sheet preparation.

Discuss pros and cons of current GAAP for income statement preparation.

Answer 1

Pros of current GAAP for balance sheet preparation;

Following are main pros of current GAAP for balance sheet prepration;

1. As per GAAP balance sheet is prepared in a specific format so it will assist accountant in preparation of balance sheet. Apart from this it also helps users in better understanding.

2. Balance sheet prepared as per GAAP provides more details on the face of the balance sheet hence users can get maximum required information from this balance sheet.

3. Permission of Off-setting is very good feature of this GAAP based balance sheet.

4. As per GAAP based balance sheet, users will get more relevant and upto date information.

Cons of current GAAP for balance sheet preparation;

Following are main cons of current GAAP for balance sheet preparation;

1. Items of balance sheet are not properly classified between current and non-current hence existing GAAP have such limitations.

2. Minority interests are not disclosed as per GAAP presentation so this is major limitation of this type of balance sheet as per GAAP.

3. In present time IFRS based balance sheet is known more reliable and useful hence GAAP based balance sheet becomes less effective.

4. IFRS requires less details hence IFRS based balance sheet will be less complex. Thus we can say that GAAP based balance sheet is not easy to understandable to the users.

5. GAAP based balance sheet is not globally comparable.

Pros of current GAAP for income statement preparation;

Following are main pros of current GAAP for income statement preparation;

1. As per GAAP, income statement is prepared in a specific format so it will assist accountant in preparation of income statement. Apart from this it also helps users in better understanding.

2. Income statement prepared as per GAAP provides more details on the face of the income statement hence users can get maximum required information from this income statement.

3. As per GAAP less discretion is given to the accountant in preparing income statement. Hence management will not be in position to mislead investors.

4. End users will get more reliable & detailed information from the income statement.

5. As per GAAP based income statement, users can get information about the extraordinary items. As we know that IFRS based income statement does not have such extraordinary items.

6. Users can get desired information either in single step format or in mutiple-step format.

Cons of current GAAP for income satement preparation;

Following are main cons of current GAAP for income statement preparation;

1. A standard format sometime lead to regidity for the accountant.

2. Exceptional items are not presented under GAAP based format hence this is a limitation for this type of income statement.

3. In present time IFRS based income statement is known more relaible and useful hence GAAP based income statement becomes less effective.

4. IFRS requires less details hence IFRS based income statement will be less complex. Thus we can say that GAAP based income statement is not easy to understand to the users.

5. GAAP based income statement is not globally comparable.