Chapter 4 - GAAP Flashcards
What does GAAP stand for, and what is its purpose?
GAAP stands for Generally Accepted Accounting Principles. It includes the rules, standards, and procedures that companies use when preparing their financial statements. The purpose of GAAP is to make financial information useful to investors, creditors, and others who make decisions based on a company’s financial reporting
Who establishes and administers GAAP rules?
GAAP rules are established and administered by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA)
Are GAAP rules strict imperatives?
No, GAAP rules are not strict imperatives but rather guidelines and principles open to interpretation and judgment calls. Accountants must figure out how a given principle applies to their business
What is the purpose of the footnotes in a company’s financial statements?
Footnotes often explain how the company’s accountants interpreted GAAP guidelines and how assets are valued
What are some of the benefits of a common set of accounting rules like GAAP?
A common set of accounting rules provides a reliable way to compare financial results between companies, industries, and from one year to another
What is “conservatism” in accounting?
Conservatism in accounting means that when a company expects a loss, the loss must show up in the financial statements as soon as it can be quantified. Gains are not recorded until they are known to have actually happened
What does “materiality” mean in accounting?
In accounting, “material” means something significant that would affect the judgment of an informed investor about the company’s financial situation. Every material event or piece of information must be disclosed
What are IFRS, and how do they relate to GAAP?
IFRS stands for International Financial Reporting Standards, which are used by many countries outside of the U.S.. They are generally simpler than GAAP, and there is a possibility that the U.S. may adopt them
What is the role of a company’s Chief Financial Officer (CFO)?
The CFO is involved in the management and strategy of the organization from a financial perspective and oversees all financial functions
What are “non-GAAP” numbers?
Non-GAAP” numbers are financial results that do not follow the rules and guidelines of GAAP, often used by companies for internal management purposes or to more accurately portray the company’s performance
What is the role of a company’s controller?
The controller’s focus is purely internal, responsible for providing reliable and accurate financial reports, general accounting, financial reporting, business analysis, and internal controls
What is a 10-K report?
A 10-K is an annual report that publicly traded companies must file with the SEC, including detailed information such as company history, executive compensation, risks, and financial statements
What is a 10-Q report?
A 10-Q is a quarterly report that publicly traded companies must file with the SEC, which primarily reports a company’s financial results for the most recent quarter
