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Generally Accepted Accounting Principles (GAAP) is described as the standard framework guiding principles that are used for financial accounting in a particular jurisdiction. The GAAP include standard concords and rules that accountants should follow while recording, briefing, and general preparations of a financial statement (Bonham & Ernst & Young, 2008). GAAP is usually obligatory in companies where investors have lowest regularity levels in the financial statements. Investors use the financial statements to analyze companies for investment purposes.
The 1992 great depression led to a crash in the stock market. The congresses passed a Securities Act in 1933 and in 1934 the Securities Exchange Act. The Acts introduced a methodology for regulating account performances among public held companies and set standards. From 1936 to 1973, the American Institute of Certified Public Accountants was given the responsibility of creating and maintaining accounting standards. After the American Institute of Certified Public Accountants, the Financial Accounting Standards Board took over the responsibility (Lubbe & Watson, 2006).
A large number of investors worldwide have chosen mutual funds as their desired area of investment activities. Most investors are investing in the stock market thus the use of GAAP helps them know when and where is best to invest (Williams & CCH Incorporated, 2010). Fact decrees the investors should invest and look for companies with solid earnings, positive cash flow, and a strong balance sheet (Lubbe & Watson, 2006). A company can accomplish all the needed requirements by the use and application of the generally accepted accounting principles (GAAP).
A financial statement that has been prepared in accordance to the GAAP is very useful for an investment analysis due to a number of reasons. First, an investor can use the financial statement to review the company’s general performance. When all the financial statements are in GAAP, there is likely to be a consistency in the company’s performance consequently good and attractive to the investors. Most investors are recommended to use GAAP to review and measure a company’s performance and development. A GAAP prepared financial statement would be useful as investors can use the statements to compare a company with its competitors (Williams & CCH Incorporated, 2010). This is because GAAP excludes the statistical and operating financial measures when measuring the company’s performance hence giving a real and actual figure.
A number of organizations influence the standards and regulations in the GAAP. These organizations work together to come up with the standards of the GAAP. Initially, the United States Securities and Exchange Commission (SEC) that works hand-in-hand with private organizations such as the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board to come up with the settings and standards of GAAP. The GAAP is influenced by multiple influential organizations. There are organizations like the Government Finance Officers Association who influence financial policies for the United States government. Lastly, the Government Accounting Standards Board (GASB) influences GAAP. GASB organization addresses the local government and state reporting issues (Bonham & Ernst & Young, 2008). The structure of the GASB is quiet comparable to that of the FASB. There are other organizations that influence the GAAP, for instance, the American Accounting Association and the Institute of Management Accountants among other organizations.
Using GAAP to prepare financial statements is recommended to all companies as it aids in avoiding loopholes in the financial reports. Organizations that are seeking investors are commended to use GAAP as this provides some level of transparency, which is always appealing to investors. Finally, a GAAP prepared financial statement is likely to have no mistakes or minimal mistakes when audited by and external auditor.
Reference
Bonham, M., & Ernst & Young. (2008). International GAAP 2008: Generally accepted accounting practice under International financial reporting standards. Chichester, West Sussex, England: J. Wiley & Sons.
Lubbe, I., & Watson, A. (2006). Accounting: GAAP principles. Oxford: Oxford University Press.
Williams, J. R., & CCH Incorporated. (2010). GAAP guide. Chicago, IL: CCH.
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