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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 is the objective of financial reporting?

GAAP is comprised of:

  1. FASB standards, interpretations, and concepts statements.
  2. FASB financial standards.
  3. FASB standards, interpretations, EITF consensuses, and accounting rules issued by FASB predecessor organizations.
  4. any accounting guidance included in the FASB Codification.

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.(d) Which stakeholders might be affected by the decision against early implementation?

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?

(Objective of Financial Reporting) Karen Sepan, a recent graduate of the local state university, is presently employed by a large manufacturing company. She has been asked by Jose Martinez, controller, to prepare the company鈥檚 response to a current Preliminary Views published by the Financial Accounting Standards Board (FASB). Sepan knows that the FASB has a conceptual framework, and she believes that these concept statements could be used to support the company鈥檚 response to the Preliminary Views. She has prepared a rough draft of the response citing the objective of financial reporting.Instructions

  1. Identify the objective of financial reporting.
  2. Describe the level of sophistication expected of the users of financial information by the objective of financial reporting.
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