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Chapter 1: Q7CA (page 24)

CA1-7 WRITING (Need for GAAP) Some argue that having various organizations establish accounting principles is wasteful and inefficient. Rather than mandating accounting rules, each company could voluntarily disclose the type of information it considered important. In addition, if an investor wants additional information, the investor could contact the company and pay to receive the additional information desired.InstructionsComment on the appropriateness of this viewpoint.

Short Answer

Expert verified

The above viewpoint is wrong; it is important to follow the common rules, procedures, and guidelines as it brings uniformity to the financial statements.

Step by step solution

01

Meaning of GAAP

The term GAAP means generally accepted accounting principles. All companies use GAAP to prepare the organizations' financial statements. GAAP principles are commonly accepted and followed by the rules, policies, and procedures which are used at the time of preparation of financial statements.

02

Reasons for following GAAP while preparing financial statements

The main reason for following the GAAP rules while preparing the financial statements is to ensure that the financial statements are complete, have uniformity or consistency, and are comparable. The GAAP rules and procedures are commonly accepted accounting principles. When companies follow these rules and procedures while preparing the financial statements, it becomes easy for the companies to compare the company to company results from one year to another year. Even investors can rely on the company's financial statements, which are prepared based on the GAAP rules.

03

Commenting on the viewpoint of the people on the given statement

The given statement is wrong. It is necessary to follow the common rules, procedures, and policies while preparing the organization's financial statements. The decision-making is dependent on the financial statements of the company.If the company does not follow the common rules and procedures while preparing the financial statements,the important decisions are affected. If the company follows common rules and policies while preparing the financial statements, inter-firm and intra-firm comparisons get easier.

The investors can compare the company's financial statements and decide on their investment plan.

Even creditors such as commercial banks look at the financial statements of the company to give a loan to the company.

04

Conclusion

Hence, it is very important to follow the common rules and procedures while preparing the company's financial statements.

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Most popular questions from this chapter

What are the sources of pressure that change and influence the development of GAAP?

ETHICS (Rule-Making Issues) When the FASB issues new pronouncements, the implementation date is usually 12 months from date of issuance, with early implementation encouraged. Karen Weller, controller, discusses with her financial vice president the need for early implementation of a rule that would result in a fairer presentation of the company鈥檚 financial condition and earnings. When the financial vice president determines that early implementation of the rule will adversely affect the reported net income for the year, he discourages Weller from implementing the rule until it is required.

Instructions:Answer the following questions.(a) What, if any, is the ethical issue involved in this case?

The Sarbanes-Oxley Act was enacted to combat fraud and curb poor reporting practices. What are some key provisions of this legislation?

CA1-14 (Securities and Exchange Commission)

The U.S. Securities and Exchange Commission (SEC) was created in 1934 and consists of five commissioners and a large professional staff. The SEC professional staff is organised into five divisions and several principal offices. The primary objective of the SEC is to support fair securities markets. The SEC also strives to foster enlightened stockholder participation in corporate decisions of publicly traded companies. The SEC has a significant presence in financial markets, the development of accounting practices, and corporation-shareholder relations, and has the power to exert influence on entities whose actions lie within the scope of its authority.

Instructions

(a) Explain from where the Securities and Exchange Commission receives its authority

(b) Describe the official role of the Securities and Exchange Commission in the development of financial accounting theory and practices.

(c) Discuss the interrelationship between the Securities and Exchange Commission and the Financial Accounting Standards Board with respect to the development and establishment of financial accounting theory and practices.

Question: What is the benefit of a single set of high-quality accounting standards?
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