Generally Accepted Accounting Principles Flashcards, test questions and answers

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What is Generally Accepted Accounting Principles?

Generally Accepted Accounting Principles (GAAP) are a set of rules, guidelines, and standards used to prepare financial statements. The purpose of GAAP is to ensure that financial reports are comparable across different companies and organizations so that investors can accurately compare them. The U.S. Securities Exchange Commission requires publicly traded companies to follow GAAP when preparing their financial statements in order to provide the most accurate information possible for decision making by investors or other stakeholders. GAAP consists of four main components: Generally accepted accounting principles, Financial Accounting Standards Board (FASB) pronouncements, American Institute of Certified Public Accountants (AICPA) guidance, and Internal Revenue Service regulations. These components allow businesses to properly report their finances based on established standards and practices. In addition, they provide a framework for auditors when examining the accuracy of financial reports prepared by a company or organization. The primary goal of GAAP is consistency in the presentation and classification of transactions within financial statements issued by different entities over time. This helps ensure transparency between users such as investors, lenders, creditors and customers who rely on these records for making decisions about investments or business transactions with an entity under review. Without this consistency it would be difficult if not impossible to make comparisons between entities without running into issues related to varying interpretations or definitions which could result in inaccurate conclusions being drawn from the reported data presented by those entities . Overall, GAAP provides stakeholders with reliable information about a company’s performance which can then be used for informed decisions regarding investments or other important matters pertaining to the business operations at hand . It also serves as a benchmark against which management’s performance can be measured since it sets forth specific criteria that must be met when reporting certain items such as income statement account balances , assets , liabilities , equity etc.